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Europe energy ministers reach gas price cap agreement

EU energy ministers reached an agreement over a bloc-wide gas price cap on December 19 following months of contentious political negotiations. The cap comes into effect from February 15, 2023, for a period of one year and will trigger on two conditions. First, prices on the Dutch TTF’s front-month contract must exceed €180/MWh ($191/MWh) for three days, and second, the TTF front-month price must also be at least €35/MWh ($37/MWh) higher than a reference LNG price for at least three days.

Once triggered, the cap will prevent countries from purchasing front-month to front-year contracts on the TTF that are priced more than €35/MWh ($37/MWh) higher than the reference LNG price for 20 working days.

The price cap of €180/MWh is far lower than the €275/MWh trigger initially suggested by the European Union. The revised measure received support from nearly all EU member states including Germany, which supported the cap after energy ministers agreed to attach the cap trigger to LNG prices.

While the price cap was never aimed at halting the movement of seaborne Russian oil products completely, less than 48 hours after the price cap kicked in more than 20 ships carrying oil products were forced to wait for new insurance clearance by Turkish authorities before being allowed to continue their journeys, underlying the risk of unintended consequences of price caps on global energy markets.

Production disruptions on the rise again as cold snap arrives in Europe

As temperatures have dropped in many parts of Europe since the beginning of December, the number of energy-related production disruptions has been rising again, particularly in metalworking and other energy intensive-industries.

The food-making industry is also seeing production impacts as temperatures throughout the continent continue to drop

With cold air flowing into Europe during the past several weeks, December temperatures so far average 1-5 degrees Celsius colder than normal across much of central and northern Europe. As a result, Europe’s population-weighted heating demand has become anomalously high for December and the highest so far this heating season, with gas storage levels across the EU declining by 7.42% since the beginning of the month. The recent increase in heating demand contrasts with the start of the heating season (late October and November), which featured unusually warm conditions and exceptionally low heating requirements. Hence, temperatures and the impact on winter heating demand have been extremely variable so far this season.

Countries experiencing more than a 10% drop in gas storage levels because of the recent cold snap include Belgium, France, Sweden, and the United Kingdom. These countries remain at risk of power outages later this winter if unusually cold weather returns for a prolonged period

Despite the decline in gas stores, the overall energy outlook for the continent continues to remain bullish thanks in large part due to rising LNG imports which reached a record monthly high of 11.4 million tons by the first week of December. LNG supplies to the continent are also expected to receive a boost after Germany opened the country’s first floating storage and regasification terminal for LNG in Wilhelmshaven on December 15.

Meanwhile, the energy situation in France is also set to improve as three of the country’s nuclear reactors have begun ramping up output following maintenance repairs. Pressure on gas storage levels should also ease in the short term due to a forecasted increase in wind power generation as well as milder winter temperatures heading into the Christmas week.

Weather outlook

European energy supplies will begin to drop in the coming weeks as the heating season continues. The continent’s ability to make it through the winter season without gas rationing remains largely dependent on the winter weather as well as the ability of EU countries to achieve vital energy savings targets.

The recent cold in December has caused snow cover to expand across northern Europe and the Alps within the colder pattern to the north. For this time of season, the snow extent is near normal, with the highest snow depths in the Alps, Scandinavia, and the Baltic Countries.

In terms of the temperature outlook, the more anomalous cold will ease as temperatures become more variable across Europe through the Christmas and New Year’s holiday weekends. Thus, the recent spike in heating demand and energy consumption will be coming to an end.

When averaging out temperatures during the next 15 days, readings will be slightly warmer than normal across central and southern Europe. We do not see any signs for major cold or additional heating demand spikes returning to Europe over the next several weeks.

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