Our outlook on European LNG imports this winter is increasingly positive. We expect an expansion in imports of 7.9 bcm y/y to 30 bcm as October’s influx of LNG into Europe continued in November. Port receipts rose sharply last month by 3.2 bcm y/y to 6.4 bcm, supporting record-high sendout across Europe at 7.6 bcm (+4.3 bcm y/y). Sluggish European demand along with gains in LNG supply more than offset losses in Russian and North African pipe supplies. We have maintained our outlook for Russian pipeline exports into Europe to expand by 1.2 bcm y/y this winter to 83 bcm and crowd out North African pipeline imports (-1.2 bcm y/y to 22.3 bcm). Higher LNG availability during summer 2019 will support a 12.4 bcm y/y expansion of LNG takes, while pipe imports will continue to drop y/y.
The biggest story in the EU market over November and continuing into December has been the increased supply of LNG into Europe. Some persistent mild weather and high LNG stocks in Northeast Asia have softened JKM curve prices over November, taking peak winter contracts below 10 $/mmbtu after having spent most of Q3 18 trading around 13–14 $/mmbtu. The gas price weakness, combined with persistently high freight rates, mean that the market is now looking to encourage shorter journeys, which: leaves LNG from Yamal in Europe, discourages EU reloads and generally pushes more LNG into Europe. We expect this trend to continue through this winter as at least four new supply trains are reporting being on the verge of starting up, with the 4.5 Mtpa Corpus Christi, 4.5 Mtpa Sabine Pass T5, 5.5 Mtpa Yamal T1 and the 3.5 Mpta Prelude project all set to add supply in Q1 19. Given new supply on the horizon and the mild start to the Asian winter, which is limiting Q1 19 restocking demand, we now expect some 4.1 bcm of added y/y LNG supply to be available into the European market in that quarter.
For summer 2019, the 4.0 Mtpa Cameron LNG T1, 4.2 Mt Ichthys T2, 4.5 Mtpa Corpus Christi T2, 1.3 Mtpa Elba Island T1-5 and 4.4 Mtpa Freeport LNG T1 could all be adding volumes into the market. All of this upcoming supply and a very mixed outlook for global demand mean that we do think that European LNG takes will expand by a hefty 12.4 bcm y/y to 36.2 bcm this summer.
The main oddity in the market’s LNG story is that while y/y increments in European LNG imports were seen widely, Spain was the only exception, with a 0.4 bcm y/y reduction. While Spain did have a low-demand month on higher hydro generation and mild weather, it did actually take more gas from France. While some of that was probably LNG imported into France, and was helped by healthy French balances, the dynamics pushing one of Europe’s largest LNG importers not to attract any of the excess spot cargoes seems a symptom of the lack of transparency and liquidity in the Spanish gas market.
Russian flows – lower noms
While the call on EU storage did dip y/y in November by 2.8 bcm y/y, the drop could have been more significant without pipeline imports from Russia falling by 1.3 bcm y/y to 13.3 bcm. Flows through Central Eastern Europe declined the most, by 1.2 bcm, compared to flows of 9.7 bcm last year, with pipeline exports into Poland (-0.44 bcm y/y) and Romania (-0.36 bcm y/y) posting the biggest declines within the region.
Russian exports into Germany through Nord Stream were slightly softer y/y, by 0.2 bcm to 4.8 bcm, but still ran above technical capacity of 4.5 bcm/m. As we have argued, Russian exports into Europe could well increase this winter marginally if needed, but the growth in flows will be restricted by available pipeline capacity. While capacity at Nord Stream and Kondratki was fully utilised in all months of winter 2017-18, any incremental flow from Russia over the winter will need to be through Velke Kapusany (Slovakia). The November y/y fall in Russian imports did come despite Gazprom Export selling an incremental 0.56 bcm for delivery at various entry and hub points that were downstream of Velke Kapusany. The drop in Russian imports therefore really occurred as the milder November, most pronounced in those southern regions, reduced buyer’s nominations under their long-term contracts. Russian gas exports for the rest of the winter will be sensitive to underlying res-com demand, so a cold Q1 19 could help support takes, particularly in January when the y/y difference in demand will be most significant. In the February-April 2019 period, seeing any incremental supply in Europe is a stretch given how cold parts of that period were in 2018 and how much pipeline supply was used. Still, we do expect Q1 19 Russian flows to come in some 1.3 bcm higher y/y, while we could see some easing during summer 2019 given an expected reduction in EU storage injection requirements (particularly during April), dropping imports of Russian gas by 5.5 bcm y/y to 75.5 bcm during summer 2019.
Nord Stream 2 has now seen about 300 km of its 1,200 km built, with that pipeline having a target start-up date of end-2019, which certainly could suggest that Q4-19 will price at a premium to Q1-20, or at least that spread will narrow, particularly as the pipeline should allow the final 30 bcm expansion of Bovanenkovo’s capacity to be monetised. The offshore section of the 31 bcm/y TurkStream pipeline has now been finished, although there is still work to do on the onshore sections. TurkStream developers are still talking about a Q4 19 start-up of the pipeline. With it looking likely that the pipeline will just be connecting into the Turkish grid without a further interconnection into the EU, it could largely start life just replacing the 12 bcm or so of Russian gas that currently flows into that part of the Turkish grid via Ukraine, Romania and Bulgaria. As such, gross Russian pipeline flows in 2020 could fall, although net flows are unlikely to change.
North African supply growth into Europe remains a function of some fairly new and opaque oil-indexed contracts with Spanish and Italian buyers. Although North African flows increased by a hefty 1.1 bcm y/y in the first 11 months of 2018, driven by strong Spanish takes (+2.3 bcm y/y) in place of LNG, imports from Algeria and Libya have started to decline y/y in the last two months into both Spain and Italy.
In October, combined flows into Spain and Italy dropped by 0.4 bcm (12%) y/y, followed by a 0.6 bcm drop (14%) in November. While end-user gas demand has been soft in both countries, higher Spanish and Italian reservoir levels have dampened the call on power sector gas demand while greater LNG availability has increased Italian LNG takes. As we mentioned above, Spain is the current outlier when it comes to LNG port receipts, being the only European country to have actually reduced its LNG imports in November (-0.4 bcm y/y), instead looking to replace some of that with increased pipeline imports from France. We expect the same drivers to continue through this winter, with North African pipeline imports shrinking by 1.2 bcm y/y to 22.3 bcm and by a further 4.8 bcm y/y during summer 2019.