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EU Price Cap Pose Risks to Europe’s Gas Market

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According to the head of trade at the Norwegian oil company Equinor, a gas price cap proposed by the European Commission could threaten the functioning of the European gas market by reducing market liquidity, but its own gas supplies won’t be impacted. With the cap, consumers in Europe will be protected from the spike in energy costs that has occurred since Russia invaded Ukraine and contributed to inflation. Helge Haugane, head of gas and power trading at Equinor, stated in an interview that the largest issue for the company is what will happen to the liquidity in the gas market.

Prior to now, Haugane had sounded the market liquidity siren. He issued a warning in September that the roughly 1.5 trillion euros ($1.58 trillion) tied up in the margin calls that traders pay to protect against defaults could reduce market liquidity for gas and electricity and cause hardship for smaller market participants. However, he claimed that since margin calls are now “a fraction” of what they were at the end of August, this is no longer a “major issue.” The price cap, in my opinion, is the one to which we should pay the most attention, said Haugane.

The Dutch Title Transfer Facility (TTF), which serves as Europe’s primary gas trading hub and is the most liquid contract on the market, is where the European Commission is seeking to impose a cap on the front-month contract. Member states, however, disagree on the specifics. Regarding the Commission’s plan, Haugane said, “From the Equinor perspective, we should still be able to get our gas to the markets and we should get the gas to the markets where it’s needed the most.” Following a substantial decline in pipeline volumes from Russia’s Gazprom as a result of the Ukraine crisis, Equinor has surpassed all other natural gas suppliers in Europe.

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The majority of the gas sold by Equinor is traded physically in the day-ahead or even same-day markets, which fall beyond the purview of the present market intervention measures. A cap on financial contracts, such as the TTF front-month, which are used to manage pricing risks, according to Haugane, however, might push participants, such as Equinor, away from exchanges and into the bilateral over-the-counter (OTC) market. “Due to the decreased liquidity, we might also trade a little less than we normally would on the financial market. As a result, the bid-ask spread would normally be greater and the market will be less efficient “explained he.

Smaller industrial players without their own trading organization would not have the same bilateral or OTC prospects, he said, but Equinor and other significant oil firms and trading houses will be able to discover solutions for managing their risk. According to Haugane, Equinor has increased the volume of new physical bilateral gas contracts it has signed year over year by a factor of two, totaling more than 50 billion cubic meters (bcm). He stated that these contracts often have delivery terms of up to 10 years and are indexed to different gas price indices. Although there hasn’t been much interest from purchasers thus far, Equinor is also willing to talk about longer-term fixed price contracts, he noted. One explanation could be that, should gas prices on the spot market decline, such contracts also constituted a price management risk for the buyers.

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