The main story in the southern European gas markets over the last few months has been low hydro reservoir levels, which have supported higher thermal generation during peak cooling season as well as strong imports of pipeline gas and LNG. In Spain, hydro reservoir levels were 20% lower y/y at the end of August while data for Italy put the y/y gap at 16% lower at the end of August. In turn, these low levels translated into y/y hydro generation losses of 0.97 TWh y/y in Spain in August and 0.76 TWh in Italy in July.
Total gas demand in both countries logged y/y increases in August, led by the power sector. In Spain, total gas demand was 2.18 bcm, with power sector gas demand accounting for 0.26 bcm of the 0.33 bcm y/y rise. Italian gas demand was 3.93 bcm, with the power making up 0.28 bcm of the 0.46 bcm y/y rise. Gas-to-coal price relativities have been more in favour of gas on the continent over the last year or so, and as such gas-fired generation has been growing y/y since September 2016. LNG prices have fallen, with delivered spot LNG into Spain at 5.75 $/mmbtu, 0.95 $/mmbtu lower y/y.
Spain met higher gas demand with record LNG sendout (+0.60 bcm y/y) and strong pipeline imports from France (+0.27 bcm y/y). In Italy, pipeline imports from Europe were 0.91 bcm higher y/y and LNG sendout was 0.36 bcm stronger y/y. North African oil-indexed pipeline imports recorded hefty drops, of 0.95 bcm y/y in Italy and 0.72 bcm y/y in Spain, in favour of cheaper LNG and European pipeline imports. Spanish LNG takes were a record 1.35 Mt (+0.85 Mt y/y), while Italian imports rose to 0.65 Mt (+0.33 Mt y/y), according to tanker tracking information from Kpler.
Looking forward, lower Spanish and Italian hydro levels will support gas demand in the coming months. However, forecasts of milder temperatures in the September–November period suggest we could see res-com demand could well ease. For Q4 17, we now expect total gas demand to grow by 0.34 bcm y/y in Spain and Italy combined. Q1 18 could still see modest growth in gas demand due to those competing factors of milder weather but low hydro, with demand up 0.7 bcm y/y. Over all of 2018, demand is expected to be a still robust 5.53 bcm y/y. Expected growth for 2018 is based on assumptions of much more LNG coming Europe’s way from Q2 18 onwards, thus pushing more gas into power generation. 2019 growth is more modest, as hydro levels are expected to have seen some normalisation by that time.