As we move into the European winter, the outlook for imports appears mixed. LNG supply looks like it will be scarce, North African gas supply is likely to remain higher y/y into Spain but flat into Italy, and so incremental gas for Europe will have to come from Russia. Russian exports to Europe were disappointing in Q3 18, but we expect flows to grow by 2.5 bcm y/y this winter as Gazprom Export ratchets up its sales of short-term gas into the markets around Baumgarten. Strong North African flows to Spain reflect the need to balance amid less available LNG. Indeed, we expect LNG supply into Europe to be 0.8 bcm lower y/y in the winter gas season, although there could be incremental supply by March.
LNG sendout: flat to down
As we move into winter, our view is that LNG sendout will underperform in the coming heating season. The JKM-TTF spread for the Nov-18–Feb-19 peak heating season contracts has stayed at levels that support reloads of gas from Europe over the summer. While M+1 spreads narrow as we get close to contract expiry, most of that is due to the fact that Asian buyers stop buying contracts a couple of weeks before expiry as few cargoes could actually reach that market given the remaining time before delivery. With the spreads pointing to Yamal gas and other marginal cargoes being reloaded from Europe to Asia, and expectations of another strong winter of Chinese buying, we expect LNG supply to Europe to be lower y/y in most of the next four months until March, when new supply trains (5.5 Mtpa Yamal T3, 3.6 Mtpa Prelude, 4.2 Mtpa Ichthys T2, 4.5 Mt Corpus Christi T1 and 4.5 Mtpa Sabine Pass T5) all start putting commissioning cargoes into the market. For most of these projects, the initial cargoes are likely to be spot shipments, as they will occur before the start of the commercial offtake agreements. As such, as we go through the winter, there could be some upside to EU imports. But if there is a cold winter in Asia then those cargoes are likely to find a home in Japan or South Korea.
In September, a typically softer month for global LNG demand, we still expected LNG sendout to ebb and it did in fact inch down by 0.7 bcm y/y to 3.0 bcm. Regional patterns were different though, with NW Europe seeing some y/y gains in sendout as Belgium and the Netherlands saw an increase in gas demand for power due to high nuclear capacity constraints and low Nordic power availability. However, sendout into the southern European markets of Spain and Italy shrank by 0.35 bcm (29%) and 0.31 bcm (33%) y/y respectively, largely on lower demand and the ability to backfill with stronger North African flows. October is another month of typically lower gas demand globally, and LNG sendout in Europe has so far surprised a little to the upside. We expect that to be temporary, with October as a whole lower y/y as the heating season starts.
Russian flows: More for winter through the south
LNG and Dutch supply are both looking lower y/y for the coming winter, so we expect Russian gas supply to recover from its Q3 18 q/q dip and add volumes into the market. In September, while pipeline imports from Russia registered 1.09 bcm y/y growth, flows were slower than expected and fell by 0.16 bcm m/m. The y/y growth figure was due to a low base as Nord Stream maintenance took place over 1-16 September 2017. Those base effects meant that Russian exports to Greifswald were are much as 2.0 bcm (73%) higher y/y, while flows into Central Eastern Europe (CEE) were down by 1.0 bcm (10%) y/y. The drop in flows to CEE occurred despite a large y/y storage gap in that region, which was still up to 2.0 bcm after the first week of October.
Despite the slowdown m/m in total Russian exports into Europe and y/y into CEE, CDU TEK data for total Russian production indicate 3.2 bcm (6%) y/y growth in September. As has been the case for most of the year, Gazprom production led the increases, expanding by 2.9 bcm y/y to 45.3 bcm. Total production flow rates stood at 1.9 bcm/d for the month, 1.6 mcm/d higher m/m. The production gains were driven by the continued ramping up of production at the large Bovanenkovo field, which is heading to its initial 115 bcm capacity and point to increased injections into Russian storage facilities over the month.
We think Russian flows in September were capped by a lack of any additional volumes available under the long-term contracts between Gazprom and European buyers. With a new gas year now underway, incremental volumes through Nord Stream and Kodratki (Poland) are going to be constrained by a lack of spare transportation capacity. Rather, any spare capacity is at Velke Kapusany (Slovakia), although the long-term contracts promise almost no additional volumes in aggregate across gas year 2018/19. Rather, upside sits with the sale of short-term gas through Gazprom Export’s new electronic sales platform. That platform started operating in mid-September and has sold 0.5 bcm of gas to be delivered in November to a variety of points around the Baumgarten hub. At that rate, that would add 2.0 bcm of supply in the peak heating months and 2.5 bcm over the whole of winter 2018-19.
North Africa: Algerian questions
While September, as a shoulder month, is not always that indicative of what is to come over winter, combined imports of Algerian and Libyan gas into Spain and Italy expanded by 0.4 bcm (16%) y/y. Flows from Algeria continued to buck the trend of y/y declines set in Q2 18, with Spain being the main growth destination for Algerian gas for a second consecutive month. Italian imports have now been trending for the last three months around the volumes they took last year. Lagged oil-indexed prices will hit a sub-peak in October but will soften until we get to February or March, when the current ramp-up in crude prices should filter through to contract gas prices. At that time, exports to Italy could well come under pressure if Eni has still not been able to secure more direct hub indexation. We expect North African exports to the southern European region to be up y/y by 0.5 bcm in Q4 18, with most of that going to Spain. For Q1 19, we see flows being up by 0.3 bcm y/y, although downside to those numbers dominates given the recent developments in crude prices and the impact that might have on Italian demand. We see Italy taking a relatively constant 18-19 bcm of Algerian gas in 2019, although any significant y/y drops would point to a predominance of oil-indexation remaining in those contracts.