Italian and Spanish hydro reservoirs are still comfortably higher y/y, so gas demand is not likely to see much y/y growth over the rest of Q3 18. Hydro stocks have not fallen to a y/y deficit in either country despite the fairly hot start to August, with forecast CDDs to 22 August up by 5% y/y in Spain although largely flat in Italy. In July, gas demand in both countries dropped as the impact of moderate y/y increases in CDDs was overwhelmed by strong y/y growth in hydro generation. As in July, August supply is likely to be focused on pipeline flows, with Spain turning to more Algerian gas and Italy to Russian gas, with LNG sendout likely to stay low. Spain has a greater need for storage injections than Italy. Still, over August and September, we forecast Spanish end-use gas demand to fall by 0.35 bcm (8%) y/y and Italian consumption by 0.24 bcm (3%) y/y.
While Northwest Europe saw record high temperatures last month, the weather was more moderate in Spain and Italy, leaving res-com demand broadly unchanged y/y in July. As in France and Germany, Spain and Italy sustained significant declines in power sector gas demand owing to much stronger hydro generation, leaving aggregate gas demand lower y/y. Italian and Iberian hydro levels continue to post a y/y surplus. By the last week of July, Italian hydro stocks were still 0.6 TWh (16%) higher y/y, though they were some six percentage points lower m/m, while Iberian levels were up by an impressive 3.6 TWh (41%) y/y.
Strong hydro thus looks to be a headwind to growth in power sector gas demand in August. In Italy, higher power demand y/y owing to moderately higher CDDs y/y was met by a 0.7 TWh (+17%) y/y increase in hydro generation, while thermal generation fell by 0.56 TWh (4%) y/y. This dynamic was even stronger in Spain, with gas-fired generation slumping by 1.5 TWh (40%) y/y, and hydro output rising by 1.8 TWh (+146%) y/y. As a result, Italian power sector gas demand dropped by 0.11 bcm (5%) y/y, while Spanish gas into power fell by 0.3 bcm (36%) y/y.
August is a peak cooling demand month, and temperatures across Spain and Italy are respectively forecast to be moderately up and roughly unchanged y/y to 22 August. As such, incremental gas demand from either country over August and through the shoulder month of September seems unlikely unless there is a late season hot spell, and hydro has deteriorated. The more supportive trend for gas demand has been a fairly rapid decline in Alpine hydro levels, with significant m/m drops in Switzerland and Austria. Lower Alpine and Nordic hydro availability y/y this winter should be more supportive, particularly of Italian gas-fired generation this coming winter.
Spanish gas demand could benefit from the closure of the 0.4 GW Anllares coal-fired plant, which generated 0.9 TWh of power in 2017 and applied for closure in May 2017. The Spanish market and competition authority, the Comision Nacional de los Mercados y la Competencia (CNMC), and Red Electrica have both approved the closure and in July CNMC gave the plant three months to close, which would be in early Q4 18. This could add some 0.2 bcm to Spanish gas demand over the coming year.
Supply: Turning to pipes
In July, both Italy and Spain relied more heavily on pipeline supply as wide JKM-TTF differentials pulled LNG cargoes away from Europe, curbing LNG sendout. Making up for the shortfall in LNG, Spain logged a significant 0.34 bcm (41%) y/y increase in imports of North African gas, as pipeline imports from France to Spain slowed to just 90 mcm (-77% y/y).
Spain and Italy will receive lower LNG imports y/y over the rest of this summer, as a heatwave across Asia is likely to keep LNG demand in the Pacific basin for restocking brisk the rest of the quarter and the JKM at a comfortable premium to European hubs.
Spanish customers with Algerian supply contracts may have found it a convenient time to call on North African supply. Naturgy (formerly Gas Natural Fenosa) announced in July the extension of its 9 bcm/y long-term gas contract with Sonatrach, due to expire in 2021, until 2030. Pricing details were not provided. Spanish gas demand in August is likely to stay focused on pipe supply, with diversions and reloads of LNG to Asia on the table.
Algerian exports into Italy edged down by a modest 50 mcm (5%) y/y in July, while Libyan volumes were flat y/y. Imports into Italy from Northwest Europe were tight, with flows via Switzerland down by 0.3 bcm (28%) y/y, owing largely to maintenance that cut flows through Oltingue. But the ramp-up of Russian supply delivered into Europe via Slovakia provided Italy an opportunity to increase pipeline imports from Austria.
In July, Eni and Sonatrach agreed commercial conditions for the 2018-19 gas year. The two parties also began negotiations to extend gas supply beyond the current contract, which ends in September 2019. If there has been a significant move from oil-indexation to gas-indexation in those contracts, Eni would unlikely further reduce its takes of Algerian gas, although those new commercial terms only come into effect in October. As such, a ramp-up in Italian imports of Algerian gas remains unlikely over the coming two months.
Italy is one of the few countries outside Baumgarten to have carried a y/y storage surplus since late Q2 18. Lower gas consumption in July helped the country maintain a surplus of 0.12 bcm y/y at the start of August. With Nord Stream back online after maintenance in July, the Italian market is one of the few that can ease its injections into storage in the coming two months. In Spain, however, the y/y inventory deficit widened slightly to 0.15 bcm by August, from 0.12 bcm a month earlier, suggesting that Spain will need to up its injections.
|Fig 1: European hydro balances|
|Source: ENTSO-E, Energy Aspects|