European governments have a tremendous gas problem. There’s a near-term fix, but it requires politicians with a taste for market risk, writes gfhay
to write such options on its oil imports. More importantly, natural gas for delivery in late 2023 trades under 30 euros per megawatt hour, way below the 117 euros the cost of delivery next month spiked to on Tuesday.
In 2019 the UK used 876 million MWh of gas. Call options quoted on the CME Exchange cost about 7 euros per MWh. If someone was prepared to take the other side of the trade, it could cost Johnson about 5 billion pounds to guarantee sub-30 euros per MWh gas two years hence, Breakingviews calculations suggest.
Sounds good, but in practice meddling with derivatives is a recipe for trouble. One reason 2023 gas options are cheaper is because it might just take a few warm winters for the current inflation to subside. If prices dropped below 30 euros per MWh, as they did last year, hedging would have been a waste of public money.
Still, a populist backlash in response to spiking electricity costs today could torpedo the transition to a low-carbon future. During the pandemic, many states paid private employees’ wages. Far-out solutions may still be in vogue.- European wholesale gas prices surged to record highs in several contracts on Oct. 5, with gas for November delivery at the Dutch TTF hub, a European benchmark, trading at a record 120.80 euros per megawatt hour, up 26% from the previous day’s close. On Oct.
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