EU gas, oil price cap talks continue without a breakthrough

EU member states have been debating the introduction of caps on wholesale gas prices and the price of Russian oil for months, and so far a consensus seems unlikely on either proposal.

Regarding the gas price cap, the European Commission proposed on November 22 a "safety price ceiling" of €275 ($286)/MWh should be introduced for front-month TTF derivatives. But critically, the mechanism will only be triggered when the €275/MWh threshold is exceeded for two weeks, and if TTF prices are €58/MWh higher than the LNG reference price for 10 consecutive trading days within the two weeks.

Both member states and analysts have ridiculed the proposed cap as meaningless. After all, even when the front-month price at TTF spiked at close to a record €350/MWh in late August, the €275/MWh threshold was not breached for two weeks. But, supporters of Brussels' plan have noted that, once the legislation to support the cap is in force, the cap can more easily be lowered.

Poland is one of the member states dismissing the proposed cap as far too high. Polish climate minister Anna Moskwa has described it as a "farce" that will have little impact on prices. Meanwhile, Greek energy minister Konstantinos Skrekas has said a more realistic cap would be €150-200/MWh, that "could help us reduce gas prices and therefore reduce electricity prices, which is a major challenge in Europe this winter."

Others seem more against the cap in principle, including Germany, the Netherlands, Sweden, Austria and Finland, which are concerned that the measure could result in wholesale gas supply shifting elsewhere to markets that offer better prices, exacerbating the supply crunch. They also fear that a cap could disincentivise efforts to reduce gas consumption.

Even so, with 15 member states in support of some form of cap, its level and how the mechanism would work in practice seem to be the main sticking points.

Oil

EU diplomats also met at the end of last week to agree a cap on Russian oil prices, in the hope of depriving Moscow of revenues to finance its war in Ukraine without causing too much market disruption. But again, no deal was reached. Time is running out, as Brussels wants the mechanism in force by December 5, when the bloc will impose a ban on the majority of Russian crude imports.

While the EU itself is embargoing most Russian oil imports early next month, the price cap – backed also by G7 nations – would have a global scope. Shipping, insurance and reinsurance companies would be prevented from dealing with Russian oil cargoes across the world unless they are sold at a price that is the same or lower than the cap. The world's key shipping and insurance firms are based in either EU or other G7 countries.

The European Commission is seeking a cap of $65-70/barrel. Like the proposed gas price cap, this threshold would not have an impact on current Russian oil trade, as the country's flagship Urals blend is at present selling at about that price range, at a $20-25/b discount to international benchmarks, due to sanctions and buyers refusing crude because of the reputational damage. But once the cap is introduced, it could be lowered with comparative ease.

But again, EU member states are at odds over the level of the cap. Some like Poland have said before that they want a price as low as $30/b, close to Russia's marginal cost of production. The thinking is that Russia will nevertheless continue exporting crude, despite the meagre profits, fearing the cost of shutting in wells and the loss of strategic market share. But this assumes a rational Kremlin, which events this year have cast doubt on.

If Moscow were to retaliate by cutting exports, JPMorgan has recently warned that oil prices could reach a "stratospheric" $380/b if 5mn b/d of Russian supply was lost, or $190/b in the event of a 3mn b/d reduction.

Meanwhile, EU states with large shipping industries, namely Cyprus, Greece and Malta, believe that the cap as proposed by the commission is too low, and are seeking compensation for the potential loss of business, and more time to implement it.