EU Countries Reach Consensus On The Natural Gas Price Cap Deal

Key Insights

• EU countries negotiated a natural gas price cap deal. 
• The price cap will be set more than 60% above current levels. 
• Some EU countries remain sceptical about the price cap scheme. 

EU Will Set The Natural Gas Price Cap At 180 Euro/MWh

EU countries have finally managed to agree on a natural gas price cap, which would be set at 180 euro per MWh. The measure will start working from February 15, 2023.

According to the plan, the measure would be implemented when the front-month Dutch Title Transfer Facility  (TTF) contract exceeds 180 euro/Mwh for three days. Hungary was against the price cap, while Austria and Netherlands abstained.

Previously, G7 countries imposed a price cap on Russian oil. This time, the measure does not specifically target Russia, and EU tries to protect itself from the expensive natural gas regardless of its origin.

Interestingly, the original proposal from the European Commission set the price cap at 275 euro/MWh. However, the potential price cap was cut significantly as countries like Greece, Italy, and Poland worked to impose a more aggressive price cap.

Current TTF Prices Are Well Below The Price Cap

European natural gas prices have been moving lower after a huge rally that ended in late August. Currently, the January 2023 TTF contract has settled near the 110 level. Thus, the price cap mechanism will have no impact on natural gas markets in the near term.

The U.S. market is currently insulated from the developments in Europe while traders wait for the restart of Freeport LNG. When Freeport LNG gets back to work, natural gas exports will increase as prices in Europe and Asia are more attractive compared to prices in the U.S. Thus, the restart of Freeport LNG may provide material support to U.S. natural gas markets.

Meanwhile, it remains to be seen whether the European natural gas price cap scheme will work if natural gas prices get to the 180 euro/MWh level.

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