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Natural gas slumps into nine-month low as EU announce price cap


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Natural gas breaks into a nine-month low, with the EU price cap limiting demand but raising the risk of a winter 2023 supply crisis

BG_oil_pump_Brent_WTI_gas_flare_23423477Source: Bloomberg
 
 

 Joshua Mahony | Senior Market Analyst, London | Publication date: Tuesday 20 December 2022 

Natural gas price cap could bring energy crisis next year

Natural gas has seen plenty of volatility over the course of the past two-months, with the latest decline looking to complete a round-trip that saw price gain over 50% and subsequently give those gains away. Prices are on the back foot once again this week, with the freeze in Western Europe easing to lessen the demand outlook for the time being. That has helped drive prices lower as the risk of a crisis is lessened for this winter.

Meanwhile, we have seen the EU finally agree the parameters for a widely anticipated price cap on natural gas imports. The benefits of a price cap are clear, with policy makers desperate to contain inflation that has largely stemmed from the Russia-Ukraine conflict and soaring energy prices. Nonetheless, the plan does raise concerns for the 2023/24 winter given the expected difficulties in refilling storage facilities. Much has been made of the potential shortfalls over the course of this Winter, but we have approached the period with healthy stockpiles. That may be difficult to replicate given the absence of Russian imports next time around. Instead, we will likely see European nations rely heavily on imports which have typically taken place under elevated prices as they seek to outcompete demand from other continents.

The EU decision to cap gas prices at €180 per megawatt-hour, with the cap only taking effect if the price difference compared with global LNG prices is over €35 per megawatt-hour. This could spell trouble next winter if supplies aren’t sufficiently reinstated. Had the cap been in place this year, it would have been breached over 40 days between August and September.

BBGLNG201222.pngSource:Bloomberg

Natural gas resurgence falters as price breaks support to touch fresh nine-month low

While there is a significant risk that the price cap could create a crisis in Europe next year, the current demand/supply outlook has brought confidence that we will not see a pop in prices this winter. Meanwhile, the price cap in Europe will bring expectations of lower demand as exports are cut off beyond a certain price. This has brought prices sharply lower this week, reaching a fresh nine-month low today. That break below the $5.329 support level brings a head and shoulders formation that signals the potential for further weakness over the near-term. With that in mind, keep an eye out for further short-term downside from here. However, while the optimists hope that the European price cap will lessen energy inflation, it could bring about a supply crisis as stockpiles remain short ahead of next winter.

NG-Daily-2022_12_20-15h16.pngSource: ProRealTime
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