The price of gas has collapsed, for now, and Russia is threatening retaliation

The price of gas continues to fall and reaches a level not seen since before the invasion of Ukraine, despite threats from Russia to divert supplies out of Europe. The TTF of the Amsterdam stock exchange, the main benchmark for gas formation in Europe, fell by 25 percent in a week to 84 euros per megawatt hour, a level last seen on February 23 on the eve of the Russian invasion of Ukraine. Many, especially politicians, are attributing the drop in price to the agreement reached between the member countries of the European Union on the price capfor a ceiling on the price of gas – which is not actually a roof -, but there are other factors that are affecting. It is still too early to rejoice: analysts agree on reiterating that it is very probable that the latest price drops can only be a momentary illusion.

Prices going down for now

On February 23, the day before Russia’s invasion of Ukraine, the price of the Amsterdam Stock Exchange’s monthly TTF index stood at 88 euros per megawatt hour. From then on, prices experienced record increases, reaching over 345 euros on 26 August, with the price of TTF always above 100 euros, now defined as the “psychological threshold”, until the last days of December.

The celebrated price cap does not lower bills

On December 19, the member countries of the European Union announced that they had reached an agreement to apply a gas price correction mechanism, improperly called a price cap, a ceiling on the price of gas – which in reality is not -. From that day, prices began to fall to 85.5 euros, and many, especially politicians, hastened to establish a correlation between the decrease in prices and the price cap. Actually, there are more influential factors.

Because prices go down

The decrease in gas prices is due to a reduction in demand, and therefore in gas consumption throughout Europe, including in Italy. The reason is to be found in the atmospheric conditions: after the extraordinarily mild months of October and November and with above average temperatures, even in the last days of 2022 the temperatures will not be on average with “winter” values.

The reduction of gas consumption in Europe and in Italy: lower demand favors low prices-2

Consequently, even the stocks remain half full. According to GIE (gas infrastructure Europe) data, the storage facilities of European countries are filled on average to 83 percent of their capacity. Italy is above average, with a fill rate of 83.7 percent.

In addition, the availability of gas on the market has also increased due to large imports of LNG, liquefied natural gas, which has recovered at high levels throughout Europe. LNG is of vital importance to replace the missing volumes of Russian gas, now residual in the energy needs of Europe and Italy.

Will the gas from the new regasification plants be enough?

For this reason, European states are equipping themselves with regasification plants, to bring liquefied natural gas to a gaseous state and put it into the network. Italy intends to build two new plants, in Ravenna and Piombinoin addition to the existing three.

LNG in Europe, liquefied natural gas: imports also increase in Italy-2

Russian threats on supplies

Russia wants to divert its gas supplies from Europe to other markets, even if the European one remains “relevant”. These are the words pronounced by the Russian Energy Minister and Deputy Prime Minister, Aleksandr Novak, quoted by the Russian press agency tax. Russian President Vladimir Putin has repeatedly reiterated that Russia will not sell gas to anyone who applies the price cap.

Italy has resumed importing gas from Russia

“The price cap in the EU could push suppliers towards other markets without restrictions”, explained the Russian deputy minister, who in an interview with the TV channel Russia 24 he then explained how even Russian hydrocarbon companies, faced with Western sanctions, are redirecting hydrocarbon shipments towards the Asia-Pacific region, Africa and Latin America.

Because low prices will rise again

As seen, the reasons for the decreases in the gas price are various and the agreement on price cap could have little to do with it, also because the same dynamics are being observed in the other world gas markets, for example theHenry hubs United States: after days of decidedly cold temperatures, temperatures are returning above the seasonal average, favoring low consumption.

Italians are really consuming less gas: the energy blackout averted

However, pessimism remains among analysts. The time horizon is spring 2023, the moment in which all European states will return to purchase more gas to fill stocks in view of the winter of 2023-2024. Given the potential absence of Russian supplies, which made up about 40 percent of needs in 2021, LNG is the only way to get enough gas. But precisely in what will be the moment of greatest need, supplies of liquefied natural gas risk running out, due to the recovery in Chinese demand so far interrupted by the restrictions of the zero covid policy. As a result, the scarce availability of gas on the markets will push prices up.

How much gas do we have for the winter

Furthermore, a return of winter temperatures at the beginning of 2023 could be enough to throw the system into crisis, causing prices to rise again. For these reasons it is still early to say that the price cap it has already solved the problems of the energy market.

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The price of gas has collapsed, for now, and Russia is threatening retaliation