We expect total EU imports to expand by just 1.7 bcm y/y in Q3 18 driven by a 1.9 bcm y/y increase in Russian imports, given the need to refill storage. Over the same period, imports of North African gas will now drop by just 0.2 bcm y/y, as Italian buyers will stay in the market until a further increase in the price of oil-indexed gas contracts kicks in during September. We now expect LNG imports to be flat y/y, with some y/y declines in peak summer being largely offset by a modest gain in September.
In June, aggregate demand was slightly lower y/y across Europe as replenished hydro stocks curbed power sector gas demand in Spain, Italy, France and Germany. But aggregate European imports were strong in June driven by high injection demand. Strong Russian supply was complemented by rising North African supply, while LNG sendout disappointed as reloads grew in y/y terms.
North African gas surprising to the upside
North African gas exports to Europe saw something of an unexpected uptick, stepping up by 0.64 bcm (29% y/y) in June owing to increases in North African deliveries to Italy, following six months of consecutive decline. Algerian supply into Italy rose by 0.14 bcm (16%) y/y, while Libyan receipts into Italy were broadly flat y/y. The higher volumes helped offset declines in gas supply from Northwest Europe through Switzerland. The reversal of the trend could also be because Italian customers with North African supply contracts, mostly Eni, took more oil-linked take-or-pay volumes ahead of the impact of rising oil prices that will be felt in September prices. If that is the case, then July and August could see strong takes before some decline in September. Certainly, flows from the northern European markets will be constrained in July as Nord Stream undergoes maintenance and storage levels are still in deficit.
We had been forecasting that EU imports from North Africa will drop by 2.0 bcm (10%) y/y in Q3 18, but we now expect Q3 18 imports of Algerian gas to drop by just 0.21 bcm (1%) y/y, although much hinges on Italian takes. The revision is due to strong June numbers, the opportunity to purchase more oil-indexed gas before prices rise in September and the expected shortage of supplies from northern Europe. 2019 could see a y/y reductions as further increases in oil prices have already occurred and will start filtering through to oil-linked gas contract prices in Q4 18. Algeria has invested in increasing production, and current LNG spot prices suggest that any production not going towards meeting domestic demand should be monetised via LNG.
LNG heading for a period of expected y/y supply reductions
Widening JKM-TTF spreads continue to pull LNG spot cargoes away from Europe, something that is unlikely to change over the current summer or subsequent winter. The LNG supply story continued as usual in June, with promised incremental LNG deliveries to Europe failing to materialise. In June, Kpler data put LNG imports to EU terminals up by an indicative 0.14 bcm y/y, while LNG sendout across the month was down by 0.66 bcm y/y, according to system operators. The difference between port receipts and sendout did not result in all that much stockbuild as LNG reloads from the main European terminals was also up, by 0.41 bcm y/y. For July, that schedule of reloads looks even higher, up by 0.6 bcm y/y. Yamal cargoes are still largely using Europe as a transshipment point, with 0.39 bcm arriving in during June, although that number could drop in July with news that some Yamal cargoes are now navigating the northern route to Asia. Controlling for Yamal cargoes, there would be almost no y/y increase in June reloads.
The two main drivers behind dampened LNG supply to Europe are set to continue for the coming quarters. First, there were delays to the start-up of new LNG supply trains in Australia. None of the three Australian trains we expected to ramp up and export LNG in Q2 18 (the 4.4 Mtpa Wheatstone T2, 4.2 Mtpa Ichthys T1 and the 3.6 Mtpa Prelude) did actually begin exporting. Latest reports suggest that first gas from Ichthys has been pushed back to October at the earliest and first gas from Prelude to Q4 18, while Wheatstone announced it was producing LNG but has not yet moved to exporting it. When fully ramped-up, those three projects could put a combined 1 Mt of LNG supply into the market each month, although only Wheatstone might add some volumes this summer. Last month, the start-up of the 5.5 Mtpa Yamal T2 was pushed back to September, meaning new gas supply might arrive for the winter.
Secondly, the demand side has stayed strong, led by stellar imports from China. The country is now on track for an incremental 14-15 Mtpa take this year, another 0.5 Mt more than what we expected even last month, as Chinese industrial demand has provided a high underlying level of non-seasonal demand throughout the year. Outside of China, NE Asian buying will be largely dictated by weather, although we have seen some softening of South Asian demand because of high LNG prices. If the coming summer has extended periods of extremely hot weather (which it already has so far), then an even higher appetite for LNG in NE Asia could be seen.
The high demand for LNG from NE Asia has been reflected in JKM-TTF spreads for contracts for delivery in Q3 18 moving above 2 $/mmbtu in May and trading above that wide level ever since. At such a spread, the economics support all spot cargoes going to Asia, including reloads from Europe. We expect to see further y/y drops in LNG sendout from the European terminals. We now expect that Europe could see Q3 18 imports lower in July and August by 0.7 bcm y/y, down from our previous forecast of being up by around 1-2 bcm y/y. For September, the balances are showing moderate growth y/y, although price differentials do not support much in the way of incremental volumes heading to Europe.
Russian production to soften in July
Russian production continued to post impressive y/y increases (+2.2 bcm, 4% y/y) in June, paving the way for strong exports to Europe. Russian flows into Europe totalled 15.1 bcm in June, and posted the second highest y/y increase (+2.2 bcm, +17% y/y) this gas year so far, despite planned maintenance that curbed delivery capacity at Mallnow and Velke Kapusany on several days. July should finally see a slowdown in Russian receipts owing to annual maintenance, the heaviest of which will take place on the 17-30 gas days, when Nord Stream will shutdown. But as we have said previously (see Data review: Central Eastern Europe, 14 June 2018), much of the lost Nord Stream supply can be offset by increasing Yamal transit. For July, we expect Russian flows to drop by 2.2 bcm m/m. Over all of Q3 18, we forecast growth in imports from Russia of 1.9 bcm y/y.
A rise in Russian transit through Yamal could further narrow the AVTP-TTF D+1 basis, possibly even pushing the AVTP to a discount while Nord Stream is offline. Deliveries into Slovakia at Velke Kapusany rose considerably during the Nord Stream shutdown in September 2017, moving the AVTP to close at a peak 20 cent/MWh discount to the TTF on one day, compared to an average premium of 66 cents/MWh before the shutdown. Moreover, there is a prominent difference in y/y stock levels between the Baumgarten region and Northwest Europe, which is placing further narrowing the AVTP-TTF basis this summer, with Baumgarten posting a 0.8 bcm y/y surplus compared with Northwest Europe’s 2.7 bcm y/y shortfall. The AVTP-TTF D+1 basis is already trading much tighter y/y.
|Fig 1: Oil index and TTF prices index||Fig 2: North African gas imports, bcm|
|Source: Reuters, Energy Aspects||Source: IEA, Energy Aspects|