How botched EU regulation increases gas prices

Last week I discussed with Seb Kennedy for his newsletter Energy Flux News why prices of natural gas on the TTF market had been increasing over the previous weeks despite strongly bearish fundamentals.

You find below the link to the note that Mr Kennedy has published based on that.

My point is that mandated uncoordinated buying by price insensitive European gas storage managers gives an easy ride to hedge funds and midstreamers (who can push up prices knowing that someone will buy anyway).

Make no mistake: filling EU gas storage is a necessary buffer against supply shocks. Nobody could argue against that. The issue is how much and how:

• Mandating a fixed quantitative refilling target by a fixed deadline no matter the demand and supply situation is not very clever. EU demand this year is likely to be more than 30% lower than in 2022 (source: Reuters), and as a consequence the mandated refilling levels today are in relative terms about 50% higher than two years ago. I.e., in 2022 they amounted to about 20% of EU demand, now they are almost 30% of it ?(source: Gas Infrastructure Europe). BCE sets Euro central interest rate every quarter and nobody sane in their mind would suggest that the rate should remain the same no matter inflation levels and economic cycle.
• Having different countries’ storage managers buying in an uncoordinated way is stupid.
• Forcing them to buy spot is unbelievably stupid, considering that supply is dominated by very few suppliers (Equinor in particular).

And in addition to all of the above, the majority of physical demand comes from price insensitive buyers like gas retailers and power generators, which can pass through their purchasing costs to end users thanks to the regulation called System Marginal Pricing. This is gigantically stupid.

The Energy Flux note explains my proposals to change this. In summary:

• scrap the mandatory target, and set it dynamically on the basis of the expected demand/supply balance.
• coordinate the purchases among storage managers across EU (i.e. at least avoid buying en masse in the same time).
• try to buy some quantity through long term supply contracts, possibly at fixed price.

Is anything going to change? Don’t hold your breath for it. You can read the reply of the EU to the note. The “don’t bother me with the facts” attitude of the EU bureaucrats is nothing but crystal clear. The EU spokesperson claims that the hard refilling targets policy has created prices stability in the gas markets. Well, in Brussels they must have a very low bar for something to be considered stable. Over the past twelve months, the delta between the lowest and highest price in TTF has been 150%, with huge monthly swings.

And as it happens, once the mandatory storage targets have been achieved last week the TTF price of gas on TTF has gone down by more than 10% in just five days. What a coincidence.... (and so much for price stability). And by the way other not exactly positive consequences of this regulation are:

• Prices of natural gas are going to be always the lowest in the high demand winter season. Is this how the EU wants to incentivize energy efficiency?
• the storage managers are by design going to accumulate losses as they buy high and sell low, losses that will burden regulated tariffs for years to come.

I can't help but closing by quoting brett christophers ("The price is wrong", with some tweaks):

The 2021 energy crisis revealed an EU institutional community (the energy and climate commissions, and the EU country energy regulators) that in its efforts to first liberalize, then to decarbonize and more recently to secure supply in the energy sector, has fashioned a monster whose complex and contradictory nature they barely even understand, let alone can effectively manage.

Note: the views expressed in this post reflects only my personal opinions.

https://www.dhirubhai.net/posts/energy-flux_energy-naturalgas-europe-activity-7232414900281626624-SnGu?utm_source=share&utm_medium=member_desktop