Through the remainder of 2018, we continue to expect less gas in Southern Europe to go into power given lower LNG availability on strong Asian demand and delayed new Australian supply, with LNG sendout in Spain and Italy 25% and 40% lower y/y in June. Stronger hydro generation in June also reduced thermal’s share of output in the generation mix, which has led us to reduce our estimates for power sector gas demand further with healthy reservoir levels in both countries. We have lowered our forecast from last month for Q3 18 power sector gas demand in Spain, by 0.1 bcm, to now total 1.8 bcm (-0.24 bcm y/y). Italian power sector gas burn during the same period is now set to total 5.3 bcm (-0.8 bcm y/y), 0.5 bcm lower than our forecast last month.
In June, strong hydro generation and mild weather y/y curbed power sector gas demand in Spain and Italy offsetting increases in non-power sector gas consumption. In Spain, a gain in hydro generation of almost 1.95 TWh (113%) y/y and much cooler temperatures (CDDs down by 44% y/y) pushed all sources of generation significantly lower, with gas dropping by 0.9 TWh (29%) y/y and power sector gas burn slipping by 0.2 bcm (27%) y/y. July is starting with Spanish reservoir levels 71% higher y/y and 14% higher than the 10-year average. The CDD count for the first half of July is for slightly cooler weather y/y, so while hydro generation should expand given high hydro stocks, some of the drops in thermal seen in June are unlikely to be repeated. We now expect Spanish power sector gas demand in Q3 18 at 1.77 bcm, 0.24 bcm lower y/y, because of high hydro levels.
However, total Spanish gas demand during the same period is set to only drop by 0.1 bcm y/y (vs a 0.3 bcm forecasted y/y drop last month) to 6.7 bcm. This is due to an upward revision to our estimate for non-power sector gas demand, from which we now expect 0.1 bcm in y/y growth in Q3 18, to 4.9 bcm, instead of a 0.2 bcm y/y drop estimated last month. We have seen continued strength recorded in Spanish industrial gas demand in the last few months. For the first five months of the year, industrial gas demand expanded by 0.4 bcm (5%) y/y to 8.4 bcm, outpacing growth in Spanish industrial production, which was up by about 2.5% over the first five months of the year.
The story was similar in Italy in June. CDDs dropped by 25% and took total power demand down, while strong hydro generation added 1.7 TWh (37%) y/y. As a result, thermal generation shrank by 3.8 TWh (26%) y/y taking power sector gas demand down by 0.45 bcm (22%) y/y. Reservoir levels were 22% higher y/y at the start of July, so the strong hydro story continues. Weather forecasts for the first half of July indicate CDDs will be lower by a smaller 7% y/y, so we expect total gas demand in Q3 18 to be 11.7 bcm (-0.8 bcm y/y), 0.5 bcm lower than our forecast last month. We forecast power sector gas demand to fall by 0.8 bcm y/y to 5.3 bcm following a 0.5 bcm downwards revision from last month.
Looking forward, our expectations of lower LNG availability into Europe—certainly until the new phase of liquefaction trains come online in the US by the end of 2019—have lowered our expectations for power sector gas demand for the upcoming winter in Spain and Italy. We expect power sector gas demand in Spain during the winter to be 3.4 bcm, mostly in line y/y and a 0.2 bcm downward revision from last month. We have adjusted upwards our forecast for non-power sector gas demand for the upcoming winter, to an increase of 0.4 bcm y/y to 14.9 bcm vs a projected 1.1 bcm y/y drop last month. As a whole, we expect Spanish total gas demand to grow by 0.4 bcm y/y to 18.3 bcm as opposed to the 1.0 bcm y/y drop we had expected last month. This is mainly driven by the upward revision of non-power sector gas demand, which offsets lower growth in power gas burn. During the same period for Italy, we forecast power sector gas demand to be 0.1 bcm lower y/y, with total gas consumption at 46.3 bcm (-2.2 bcm y/y), a 0.2 bcm downwards revision from last month.
No incremental LNG but Algerian gas has filled the gaps
Supply in July is likely to reflect some of the trends observed over June. In June, Spain’s LNG sendout dropped by 0.3 bcm (25%) y/y, while sendout in Italy was 0.4 bcm (40%) lower y/y. According to tanker tracker information from Kpler, Spanish LNG takes dropped by 0.3 bcm (19%) y/y to 1.2 bcm, while Italian LNG imports were also 0.3 bcm (32%) lower y/y at 0.6 bcm. We also expect to see some Spanish reloads in the coming months, as the prevailing JKM-MIBGAS spreads are wide enough to support that activity.
European pipeline imports generally eased into both countries in June, but the main surprise was relative strength in North African imports. Spanish imports of Algerian gas were up 0.5 bcm y/y while Italian imports from North Africa increased for the first time in six months, by 0.1 bcm (40%) y/y. The growth in Italian imports was driven by a drop in Russian gas imports by 0.1 bcm, as flows into Slovakia (-0.3 bcm or 8% y/y) fell on planned maintenance at Velke Kapusany.
Over June, Spain only injected 72 mcm into storage (-40 mcm y/y), with stocks as of 1 July at 1.9 bcm, down by 0.1 bcm y/y. Italian stocks received a 2.2 bcm injection, leaving storage levels as of 1 July at 12.9 bcm, up by 0.2 bcm y/y. Given these comfortable storage levels, the pull on gas for injections into storage in these countries in Q3 18 will be around the same as it was last year, a combined 5.9 bcm.