A narrowing of the JKM-TTF spread in recent months has led to a six-year high in European LNG imports—5.5 bcm in October (+1.5 bcm y/y)—and there are no signs of any let up in November. The markets of Northeast Asia purchased all their LNG needs for a seasonally normal winter during the summer, while warmer-than-normal weather in recent months muted any appetite for additional spot cargoes. The hike in freight rates has also encouraged shorter journeys, disincentivising re-exports from European ports. We have now upwardly revised our forecast for Europe’s LNG imports this winter to be up 8 bcm y/y, having previously expected imports only to be up 1 bcm y/y. Despite a slowdown in flows from Russia in October, we expect Europe’s imports from Russia to be 1.2 bcm higher y/y, although a much milder winter could ease that number and we predominantly see downside risks to that number. Amid prospects of ample LNG and Russia gas, we expect oil-linked North African pipeline flows to be modestly crowded out of Europe this winter with a drop in expected imports of 1.2 bcm y/y.
LNG is back, alright
An influx of LNG supply into Europe dominated the supply story last month. Total net imports jumped by 1.5 bcm y/y to 5.5 bcm in October, while preliminary data for November suggest that net takes will come in 1.3 bcm higher y/y at 4.5 bcm, and there is still plenty of time for additional cargoes to be added. Reloads from Europe slumped in October to just 22 mcm (-0.4 bcm y/y), with the combination of low shoulder-month demand, a narrowing of the JKM-TTF spread, and high freight rates all good incentives to leave volumes in Europe. With European LNG terminal storage filling and incoming cargoes still being scheduled, LNG sendout expanded by a record 2.4 bcm (89%) y/y to 5.2 bcm. Belgium’s Zeebrugge terminal saw its daily sendout rate reach 38.6 mcm/d on 24 October, a hefty increase from the 2 mcm/d rate logged on 24 October 2017.
In terms of LNG origins, some 1.1 Mt in September and some 0.85 Mt in October came from Yamal. This is a total 2 Mt more LNG y/y over the two months (reflecting the fact Yamal had just started), which has been instrumental in allowing Europe to build stocks and boost sendout. Yamal gas is predominantly landing at NW European terminals—Grain, Gate, Zeebrugge and Montoir. With that gas transshipping in Europe, some of it might be bid away to NE Asia, although reports of LNG floating storage in NE Asia and a warmer-than-normal weather forecast in NE Asia suggest light reloading demand.
In addition, the new trains expected to be online this winter are beginning to start up, with the 4.5 Mtpa Corpus Christi T1 and 4.5 Mtpa Sabine Pass T5 both scheduled to export first LNG in the coming weeks. News flow on the 3.6 Mtpa Prelude has been light, although a reduction in gas flaring was reported in late October, which suggests gas is now being used for LNG production. Shell guidance that Prelude will export LNG in 2018 has yet to change, so we expect it to load at least one cargo in Q4 18. Given the outperformance on supply and a mild start to the winter, we now expect net European LNG imports to be up by 3.9 bcm y/y across Q4 18 and another 4.1 bcm y/y in Q1 19.
Further supply additions are expected in H1 19—5.5 Mtpa Yamal T3, 4.2 Mtpa Ichthys T2, 4.0 Mtpa Cameron, 4.5 Mtpa Corpus Christi T2 and 1.3 Mtpa Elba Island T1-5—which leads us to peg European LNG takes over 2019 to be up by some 22.0 bcm y/y.
October piped imports from Russia and Algeria down
Greater LNG availability into Europe encouraged strong sendout rates and offset declines in Russian and North African pipeline imports in October.
Total imports of Russian gas shrank by 0.6 bcm y/y to 13.4 bcm as flows into most countries were either lower or flat y/y. As last year, capacity through Nord Stream was maximised and exports into Germany were flat on the year at 5 bcm, while exports into Poland, Hungary and Romania lagged y/y. Only exports through Ukraine into Slovakia registered growth, expanding by 0.2 bcm y/y to 3.4 bcm.
Despite the slowdown in flows through October, we expect imports of Russian gas to grow by 1.2 bcm y/y to 84 bcm this winter, making use of available spare capacity through Velke Kapusany. November imports from Russia will be buoyed by the 0.57 bcm sold on the Gazprom Export ESP, with most of that being delivered to Waidhus and to VTP Slovakia. Selling for December gas on the ESP was already 0.32 bcm in early November, suggesting Gazprom is targeting another 0.5 to 0.6 bcm of sales, again with the bulk being sold at delivery points that will be reached through Velke. The current y/y storage deficit that persists in Germany and Central Eastern Europe should help keep Russian flows moving into Europe this winter, although those deficits are narrowing on the warmer y/y start to November. A mild winter will see Russian gas flows ease as nominations come off, so overall flows could be lower despite the incremental sales. However, we still expect support for Russian flows as the market will want to end the heating season with storage levels higher than posted at the end of March 2018.
Looking further ahead, to summer 2019, we expect Russian pipeline imports to drop by 5.6 bcm y/y to 76.8 bcm, as more LNG is expected to arrive and higher end of March storage levels will reduce the need for summer injections.
Algerian flows into the EU market dipped on low October demand, with imports into Spain down by 0.35 bcm y/y. That Spanish dip came on lower demand (-0.1 bcm y/y), but also higher LNG sendout (+0.12 bcm y/y). That combination of higher LNG and lower Algerian imports could well persist, particularly with Iberian gas demand for power looking to remain low on higher hydro reservoir levels, which were up by some 2.9 TWh y/y at the start of November.
Algerian flows to Italy in October came off by some 0.13 bcm y/y. Overall Italian port receipts expanded 0.17 bcm y/y to 0.7 bcm and LNG sendout increase by 0.3 bcm, which again points to some crowding out of pipeline flows by LNG in the month. Of all the supplies into Europe, the oil-indexed nature of much of Algeria’s supplies makes it most susceptible to losing market share to LNG imports. Given this and that oil-indexed gas prices are now starting to reflect the higher oil prices that started in May 2018, Algerian gas flows are unlikely to see much upside over the remainder of this winter. We expect Algerian gas exports to Europe to drop by 0.6 bcm y/y in each of Q4 18 and Q1 19 – again with greater risks of higher reductions than forecast.