Soaring gas prices threaten families and businesses. The government wants to run for cover. Is there a great deal of speculation on gas prices underway, as stated by Minister Roberto Cingolani? And what are the reasons for this? To answer these questions, the first thing to do is to explain how the gas price formation mechanism takes place.
The premise, which must be kept in mind, is that the exit from the pandemic and the strong economic recovery in 2021 created a bottleneck on the international market well before the Russian invasion of Ukraine. The bottleneck has worsened due to the concerns generated by the war in Ukraine, a country along which passes the pipeline that carries Gazprom's natural gas from Russia to Europe. Third, but not least, factor: gas is a raw material (commodity) that can be traded on the financial markets through instruments such as futures and derivatives. This generates a financial price detached from the material exchange of energy. Gas is listed like the shares of a company that rise and fall according to logics other than industrial ones. And it can reach, as we have seen, very significant peaks.
Speculation on gas prices: Minister Cingolani's accusations
“A year ago in this period – Minister Roberto Cingolani reported in the report to the Senate – gas was expensive 30 cents a cubic yard and filling a storage of 10 billion cubic meters of gas cost 3 billion. The price per cubic meter in March 2022 – he continued – is instead equal to 1,5 euros per cubic metre. The potential cost of storage has therefore risen to 15 billion. Since the quantity of gas has not decreased and the flows are substantially similar, I observe that it is not fair to go from 3 to 15 billion. Mine is a harsh statement, legally perhaps not correct, but I think you can understand the spirit of the statement”.
The bill presented by the minister on Wednesday morning is very clear and reinforces the accusations of price speculation launched by him a few days ago. However, Cingolani himself clarified:
“It's not that there's anyone doing the wrong thing in Italy; it is clear that this is a problem of market quotations on exchange hubs which do not work on the material produced but, precisely, on the exchange of certificates, futures and derivatives. It is a problem that is bringing operators and citizens to their knees and which concerns all of Europe”.
Speculation on gas prices: what is the TTF and how it works
Therefore, it is not groups such as Enel, Eni, Hera, A2A or Acea under accusation but the price determination mechanism which only partially depends on the real supply-demand game. In fact, the price is largely the result of financial negotiation on markets such as the Ttf – Title Transfer facility. This is the trading market in the Netherlands where the most important European gas hub is located. Contracts are made in euros per megawatt hour, a measure which is then converted into euros per cubic metre. The price is currently around 117 euro/Mwh. In the United States, the reference hub is the Henry Hub in Erath, Louisiana.
Gas contracts can be daily – the more speculative – or long-term. It is not the quantities of raw materials that influence negotiations – in a period like this – but the fear that the war in Ukraine could lead to an interruption of supplies from Russia to Europe. Prices began to rise from September 2021 as the winter season traditionally characterized by price increases due to increased demand approached. The crescendo of prices has skyrocketed from January 2022 onwards.
Gas Price Speculation: What Can Happen Now
No one has a glass ball and is able to predict the future. A control mechanism at the European level could help to control prices but it is difficult to act when there are hundreds of operators trading shares on a market. Everything is even more difficult in this period and is influenced by psychological factors such as the fear of deterioration in exchanges.
Paolo scaroni, former CEO of Enel and Eni and current vice president of Rothschild as well as president of Milan, ventured a prediction in recent days in an interview with La Stampa. “Prices – he said – will fall precipitously by themselves, the supplies are there and spring is upon us. The roof is useless." According to him, Moscow will not close the supplies: «Today, they are more indispensable than ever for Russia. Then of course we can discuss the political opportunity to finance the war, but that's another topic. In terms of commercial relations, in the short term Europe has no alternatives unless very heavy renunciations». According to Scaroni, it takes at least three years to emancipate oneself from Moscow: «In 12-18 months imports can be halved at most».
It is not said that Paolo Scaroni's predictions turn out to be perfectly centered given the ongoing war. But the opposite is not said either. And we must not forget that the price of gas affects only half of the bill we pay. The rest are VAT and excise duties. But to act on those, you need the consent of the EU.
