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As Europe Implodes, It Plans "Radical Intervention" Including Price-Setting, Suspending Derivatives Markets And Europe-Wide Margin Call Bailouts

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by Tyler Durden
Monday, Sep 05, 2022 - 12:11 PM

Just when you thought the narrative couldn't get any more idiotic, Europe shocks just about everyone.

A few days after the EU threatened commodity traders it would stage an "emergency intervention" to crush energy prices which were rising at a pace of about 20% per day (perhaps Europe can now print nat gas and electricity in addition to monetizing all deficits while injecting trillions in the process)...

... a move which actually worked for a few days until Putin reminded Europe who's boss late on Friday when Gazprom suddenly decided it would "completely halt" all Nord Stream 1 transit altogether due to an "oil leak", with the news sending global stock markets plunging and threatening to push European gas and power prices back to all time highs when markets reopen on Monday as well as forcing Sweden to follow Austria and Germany in bailing out energy companies as Nordic authorities warned of a “Lehman” moment risk, late on Sunday Bloomberg reported that European ministers will discuss "special measures to rein in soaring energy costs - from gas-price caps to a suspension of power derivatives trading - as the bloc scrambles to respond to latest developments in the deepening crisis." A draft document seen by Bloomberg News notes that the Czech Republic, which holds the European Union’s rotating presidency, is set to include those tools on a list of emergency intervention options to be discussed at a meeting of energy ministers on Friday.

While anything it does is doomed to fail, Europe has been scrambling to stave off an energy catastrophe that’s threatening to become an economic, social, and even financial crisis too.

European leaders have been working for months to try to offset the impact of Russia’s squeeze on gas -- a move they describe as the weaponization of energy. But the decision late Friday by Gazprom PJSC to keep the crucial Nord Stream pipeline shut brought on a new sense of panic.

In response to soaring energy prices and rationing of firewood, over the weekend, Germany - the country most affected by the Nord Stream cutoff - unveiled a $65 billion package meant to boost demand and to protect consumers, with a levy on windfall profits, in effect completely undoing the ECB's efforts to squash demand by hiking interest rates and ending QE, similar to what the Biden admin is doing to the Fed in the US.

At the same time, thousands of Czechs protesting in the streets this weekend served as a reminder of the social and political risks.

“It is clear that the upcoming heating season will test the resilience of the EU energy market,” the Czech presidency plans to tell member states, according to the draft document for the emergency meeting. “It is critical to take stock of market developments and identify possible measures to address high electricity prices driven by high gas prices.”

So what can Europe do? Nothing really, but it will pretend to be in control until the bitter end. The options the Czech presidency is set to suggest - according to Bloomberg - would complement measures floated by the European Commission in a policy note seen by Bloomberg last week. They included a power-demand reduction and price caps on renewables, nuclear and coal, all of which are of course dead-ends. The presidency is poised to propose similar "solutions" in the power sector and float the following additional tools:

To limit the impact of gas prices on power prices:

  • temporarily capping the price of gas used for electricity generation
  • putting a price ceiling on gas imported from Russia
  • temporary exclusion of power production from gas from merit order and price setting on the electricity market could also be an option

Uhm, someone should tell Europe that since Russia is already barely exporting any "weaponized" gas to Europe to destroy the continental economy, setting a price cap on whatever molecules of gas are left won't really do anything at all. But this is what happens when Europe is run by absolute idiots.

It gets better: to increase liquidity in the energy market, where virtually nobody trades any more since there is simply no physical with which to hedge financial positions, Europe will propose:

  • an urgent Europe-wide credit line support for market participants faced with very high margin calls
  • capping the limits for margining or automatic price ceiling adjustment
  • temporary suspensions of European power derivatives markets.

In short, Pierre Andurand was not only absolutely spot on when he said the "oil market is completely broken" but now every other commodity market is about to be "regulated" to death. Which means paper prices may soon hit 0 as physical prices approach asymptote (i.e +∞).

The Czech presidency is also set to suggest an even more humiliating and laughable assessment of how the EU could use its "carbon market" to address high electricity prices and ensure a quick deal on a commission proposal earlier this year to sell some permits withdrawn from the market and kept in a special reserve. Such sales - Bloomberg reports - "would boost supply of emission permits, helping lower their prices." Spoiler alert: they won't do jack shit.

And in typical European word goulash style, the most hilarious idiocy was as usual saved for last: here it is from Bloomberg.

The planned intervention should be designed in a way to avoid an increase in gas consumption or jeopardize the efforts to cut gas demand. It should be simple to implement and coordinate across the bloc and be consistent with the bloc’s climate goals, the presidency said in the draft document.

Yup "simple to implement", and this is where laughter breaks out. Why? Because as even Goldman said on Friday, nothing Europe does will lead to lower prices and if anything will send prices much higher. First, we excerpt from Goldman's Damien Couravlin who explains - once again - why Europe's "brilliant" plans always works in theory and collapse in practice (full note available to pro subs):

And while Europe's increasingly cartoonish leaders live in a Never Never land where they sacrifice their populations to freeze so they can continue their pro-Ukraine virtue signaling, here is Goldman explaining why Putin's response will lead to a "significant rally" in nat gas prices (full note here for pro subs).

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