EU gas price caps could lead to sharp increase in market volatility

Limiting gas prices in the European Union could lead to reduced market liquidity and increased volatility.

On Monday, the European Securities and Markets Authority issued a statement regarding the measures which came into force from February 15. The independent EU market regulator said despite obscure consequences of the imposed restrictions, any negative manifestations may occur in the future anyway. 

Some effects may only appear after the price control mechanism is activated. This may cause significant and abrupt changes on the market, which may affect its functioning and financial stability.

In December, the EU agreed to impose a cap on gas prices in order to avoid the sharp fluctuations seen last year. However, there are some concerns that this could subvert supply chains and also disrupt the market processes.

The restriction requires several conditions to take effect: gas prices at the TTF hub in the Netherlands must be above 180 euros per megawatt hour, and they must be at least 35 euros higher than global LNG prices.