Over June, total gas demand in Spain and Italy increased y/y as gas stepped up to meet higher cooling demand amid persistently low hydro generation. Spanish gas demand was up by 0.28 bcm (15%) y/y while Italian demand was 0.63 bcm (18%) higher y/y. Power sector gas demand was up y/y in both countries, by 0.60 bcm (58%) in Spain and by 0.61 bcm (43%) in Italy.
Hydro reservoir levels continue to be low, with the y/y deficit widening, thus supporting thermal generation in both countries. Spanish reserves were 28% lower y/y and 36% below the 10-year median, while Italian levels were 22% lower y/y. Weather forecasts for the region are for Q3 to be both hotter and drier than normal. This should keep power demand high and keep pressure on hydro reservoirs in the south. In Europe, the southern regions are now the only ones to still have lower y/y hydro levels, and this looks likely to continue into Q4 17.
On the supply side, strong Norwegian output and Russian exports into Europe have offset falling imports from North Africa. Spain imported 0.30 bcm more y/y from France, while Italian imports through Switzerland and Austria stepped up y/y by 0.79 bcm and 0.44 bcm respectively. Algerian pipeline imports into Spain shrank by 0.46 bcm y/y and by 0.83 bcm to Italy. This is likely due to the high levels of oil indexation in Algerian gas contracts. With those indexes now reflecting the increase in oil prices seen from December 2016, the softness of European hubs has left that gas largely out of the money against other supplies.
In addition to taking more northern European piped gas, Spain and Italy also took 0.39 bcm and 99 mcm more LNG y/y respectively. Spain, with its much larger LNG regas capacity, is always likely to log higher incremental LNG takes than Italy. At current levels, Spain is on track to take some 2.5 bcm more LNG than last year, which is just under half of the incremental LNG we expect to be headed for Europe in 2017.
Looking forward, lower Spanish and Italian hydro levels and the outlook for hotter summer weather than last year mean that we expect gas demand in both countries to increase. We have Q3 17 up by 1.4 bcm, while the persistence of low hydro levels and more competitive gas informs our forecast for Q4 17 gas demand to grow by 1.5 bcm y/y from these two countries combined.