We expect total EU imports to expand by 1.3 bcm y/y in Q3 18 driven by a 1.8 bcm y/y increase in Russian imports, given the need to help storage refill. Over the same period, we forecast that LNG imports will increase by 0.7 bcm y/y, while imports of North African gas will drop by 1.2 bcm y/y as rising oil prices continue to make oil-indexed gas from Algeria less attractive for Italian buyers.
Aggregate demand fell across most of Europe in May as warm, sunny weather cut res-com demand, while high renewable generation curbed power sector gas demand. Despite softer demand in most of Europe, overall imports were higher on strong injection requirements. In May, a total of 12.3 bcm was injected into storage, 2.6 bcm more y/y, leaving stocks at 37.9 bcm as of 1 June. The increase in imports was driven by higher imports of Russian gas, which totalled 13.8 bcm (+0.5 bcm y/y). LNG sendout was 80 mcm higher y/y at 4.5 bcm, while North African flows fell for the second consecutive month (-0.3 bcm y/y to 2.5 bcm).
We have expected that Russian supply would be a key supply source to compensate for any weakness in European production or a lack of LNG, and that was exactly the case in May and so far in June too. Russian gas production has been strong (+3.5 bcm, 6.4% y/y), so the country has plenty of gas to be able to sustain higher exports to Europe. July could see some price basis widening between the TTF and AVTP as the 55 bcm/y Nord Stream pipe undergoes maintenance during the month (17-30 July). Last year, the maintenance period involved the closure of both lines between the gas days of 11-22 September, resulting in a 0.63 bcm (18%) y/y drop in gross Russian flows into Germany that month. However, in terms of flows to Europe, that decline via Nord Stream was offset by ramping up Russian exports via Ukraine, with net flows into Slovakia, Hungary and Romania rising by a combined 1.8 bcm y/y, leaving net Russian flows to Europe 1 bcm (9%) higher y/y in September 2017. While the same could happen this year, the main difference is the biggest y/y shortfalls in storage levels are now in NW Europe, rather than in CEE as in 2017. Still, there is still plenty of injection room in CEE markets so it could be an opportune time to fill those facilities and transit as much gas as possible to NW Europe. The net result is likely to be Russian imports at a similar level to last year, which should push the TTF to a premium to the AVTP. For Q3 18, we expect Russian gas supply to be up by around 2 bcm y/y.
The limited growth in LNG in y/y terms is unlikely to change in the next few months, as the JKM-TTF spreads for the peak summer contracts are now so wide (above 2 $/mmbtu) that almost any spare cargoes will go to Asia rather than coming to Europe. Spreads should even pay for reloads from European terminals. While last month’s global balances suggest that LNG imports into the EU will rise by around 5 bcm y/y in Q3 18, it is hard to see those volumes being delivered in either July or August given the widening of those spreads. Part of the tightness is down to three Australian trains being delayed from Q2 18 to no earlier than Q3 18. Those three trains should deliver supply in Q4 18 (adding about 1.5 bcm/m of supply when fully ramped), but Chinese demand is likely to absorb most of that, and risk weighting our summer balances suggests that EU sendout is likely to be up by around 1 bcm y/y. In Q4 18, we expect LNG volumes that could be available to Europe could be up by some 4 bcm y/y, but a cold start to winter in NE Asia could well absorb all of that gas, and risk weighting that outlook suggests that EU markets would do well to attract 1-2 bcm over Q4 18.
North African gas exports to Europe have been down y/y for two consecutive months, suggesting another weak summer for Algerian pipeline exports ahead. The big driver continues to be weak Italian buying of Algerian gas, down by 0.37 bcm (29%) y/y in May, following similar weakness in April. We have argued that with hub gas prices rising quicker than oil-indexed contract prices, y/y losses seen in Algerian gas should be minimised, but Italian substitution away from Algeria has been substantial. Indeed, Italy took 1.28 bcm NW European gas via Switzerland in May, driven by an attractive TTF discount to the PSV. We have been forecasting that Europe’s imports from North Africa will drop by 2.3 bcm (6%) y/y in summer 2018 and we see little reason to change that forecast. 2019 could also see y/y reductions as further increases in oil prices have already been seen and will start filtering through to oil-linked gas contract prices at the start of the year. Algeria has invested in increasing production, and current LNG spot market prices suggest that any production not going to meet Algerian domestic demand should be monetised via LNG rather than pipes.
|Fig 1: European imports of Russian gas, bcm||Fig 2: European imports of North African gas, bcm|
|Source: Eurostat, Energy Aspects||Source: Eurostat, Energy Aspects|