Goldman Sachs throws cold water on EU gas price cap: too low may exacerbate energy crisis

Dec 23, 2022

Goldman Sachs said in a note this week that the European Union's natural gas price cap at such a low level could disrupt the market, curb supply in the region and exacerbate the energy crisis.


EU energy ministers reached an agreement on Monday to cap gas prices at 180 euros per megawatt-hour, well below the 275 euros per megawatt-hour originally proposed by the European Commission last month.


According to the EU draft text, if the European gas benchmark price Dutch TTF's front-month contract price exceeds 180 euros per megawatt-hour for three consecutive days, the price cap mechanism will be triggered.


The mechanism is designed to guard against extreme price volatility, but it also risks exposing the EU to insufficient supply and intense competition from Asia.


It won't work without setting limits on demand


Goldman Sachs analyst Samantha Dart and his team pointed out in a report that a price cap without corresponding demand constraints will not only fail to solve the problem of natural gas shortage in Europe, but may also exacerbate the current shortage by stimulating consumption.


The bank emphasized that capping natural gas prices could reduce already tight market liquidity, exacerbate the risk of reduced supply and disrupt business risk management.


Goldman Sachs also said this could lead to tighter global supplies next year and, in a worst-case scenario, governments could be forced to ration natural gas.


On the Dutch TTF market, the front-month contract for natural gas is currently at €105.80/MWh, the lowest price since November 17.


According to data from Gas Infrastructure Europe (GIE), the current natural gas inventory in Europe as a whole is 83.82%.