Citi’s Global Head of Commodities Research Ed Morse has lambasted the EU’s new gas price cap, terming it as silly, impractical and unlikely to work in tight gas markets because gas markets are global and not bifurcated into individual countries, meaning the forces of demand and supply are more likely to prevail in determining gas prices, Bloomberg reports.

As such, Morse says the price cap is likely to lead to gas shortages in Europe especially during winter months when demand is high. Further, the commodity analyst says that getting rid of the TTF natural gas benchmark is likely to cause chaos when determining gas prices especially if other existing benchmarks lack sufficient liquidity.

On Monday, EU ministers finally reached an agreement to implement a  gas price cap of €180/MWh, far lower than the €275/MWh trigger originally suggested by the European Commission. Pro-cap countries including Poland, Belgium and Greece had dismissed the original cap proposal as too high, arguing that it needs to be below €200/MWh if it is to tackle the high gas prices that the continent has grappled with this year. Interestingly, Germany also voted to support the price cap despite having reservations that the price cap will negatively impact Europe’s ability to attract gas supplies in tight and price-competitive global markets.

Under the current proposal, the EU price cap would not fall below €188/MWh, even in the event that the LNG reference price falls to far lower levels. However, the EU gas price cap would move with the LNG reference price if it increased to higher levels, while remaining €35/MWh above the LNG price. This system is designed to ensure the bloc can bid above market prices in order to attract gas in tight markets. Once triggered, the cap will prevent trades being done on the front-month to front-year TTF contracts at a price higher than €35/MWh above a reference price that comprises existing LNG price assessments.

By Alex Kimani for Oilprice.com