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Asian LNG importers are rejoicing at the EU decision to cap natural gas prices. The price cap could limit volatility and excessive price spikes on the Asian spot LNG market, traders told Bloomberg after the EU energy ministers agreed on a “market correction mechanism”, which would come into force on February 15, 2023.
Since the Russian invasion of Ukraine and the slashed pipeline gas supply from Russia to Europe, the EU and Asia have competed for LNG cargoes with prices setting record highs on both markets earlier this year amid intense competition and supply-side issues. The EU has managed to outbid Asia this year because of the higher prices in Europe and low demand in Asia, including in China.
The cap on the European benchmark – which will be triggered if the month-ahead price at the TTF hub exceeds $191 (180 euros) per MWh for three consecutive days – could limit runaway price spikes on the Asian market, too, according to Bloomberg.
Asian LNG importers could be happier with a price cap in Europe because they could thus outbid the EU for spot supply.
For Europe, however, concerns remain that a price cap and market interventions could stifle its ability to pay up for LNG supply, which, analysts and traders say, will be badly needed next year when Russian pipeline gas flows would be much lower than in the first half of 2022 or none at all.
The EU will need to cap gas demand too, along with capping the price of gas, or it risks worsening the gas shortage by inadvertently encouraging demand with the price cap, Goldman Sachs analysts said in a Monday report, quoted by Bloomberg.
Meanwhile, LNG demand in Asia has increased in recent weeks as buyers have emerged to stock up for late-winter supply. Moreover, if China’s demand rebounds to 2021 levels next year, from depressingly low volumes this year, Europe may lose the ability to easily outbid Asia for extra LNG supply.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.