Expected uptick in demand this winter will translate into renewed upward price pressures
MNCs should consider the impact of elevated gas prices in the long term and the increasing risk of a renewed energy crunch in the winter of 2023. While the proposed mechanism to control gas prices should prevent a repetition of the substantial volatility in gas futures seen during the summer months, concerns over the continued supply of LNG will prevent more drastic measures, which will ensure that output costs and inflation throughout Europe remain historically elevated through 2023.
Overview
- The EU is considering a gas price cap to prevent further surges and volatility in European gas prices.
- The measures, along with additional EU-wide energy support measures, are likely to be unveiled at the EU’s emergency meeting on November 24.
- Some EU leaders have accused US LNG producers of profiteering amid ongoing concerns regarding a winter gas crunch.
- Concerns over the potential redirection of LNG supplies in the aftermath of a price cap, which involves US suppliers redirecting exports to buyers outside of Europe, have prompted some countries, such as the Netherlands and Germany, to oppose a hard price cap.
Our View
Despite a lack of agreement between EU members, a compromise in the form of a price control mechanism remains highly likely. One potential solution is the implementation of a maximum price cap and trading ranges that will ensure that prices move within a certain corridor around the previous day’s closing price. Additionally, the EU may implement a long-term mechanism that includes setting the average closing price of gas contracts to the preceding 30 days of trading. Given strong opposition from the Netherlands and Germany, a long-term price mechanism will be more difficult to negotiate, but a short-term gas price control tool should remove some of the incentives for LNG producers to redirect supplies elsewhere and prevent a repetition of the dramatic surge in gas prices that occurred over the August period. The mechanism, however, would not represent a hard price cap and still means that gas prices in Europe will remain elevated through 2023, notably above the historical averages of 2010–2021.
Furthermore, while warmer weather and full gas inventories have resulted in the easing of the prices of European gas futures, an expected uptick in demand between December 2022 and March 2023 will likely translate into renewed upward price pressures. The likely suspension of imports of excess LNG from China and a nearly full capacity of exports of LNG from the US into Europe mean that some degree of gas rationing (either voluntary or government-mandated) remains likely. While US LNG producers have announced that they will invest US$ 30 billion in new capacity, the projects will not come online in 2023, and difficulties in securing additional supplies from Africa and the Gulf suggest that risks of new supply issues in the winter of 2023 are rising.
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