Much warmer-than-normal weather in February softened total European gas consumption, and high LNG imports and sendout remained a feature of the market. Pipeline imports only fell moderately, as a reduction in nominations of Russian gas was offset by a ramp-up in Gazprom selling on its Electronic Sales Platform (ESP). The main fall in pipe imports was from Algeria, with reductions from Spain (-0.6 bcm y/y) and Italy (-0.8 bcm) holding out the potential for very soft exports this summer. We forecast European LNG imports to expand by 10 bcm y/y over summer 2019, revised down on some delays to the start-up of new supply trains and more maintenance expected at US LNG facilities. With our LNG import forecasts looking conservative, nominations of Russian and North African pipeline exports will still need to come off, with Algerian flows falling by 5.2 bcm and Russia dropping off by 3.0 bcm y/y in the summer.
LNG still the story
European LNG port receipts in February continued at elevated levels, at 4.6 bcm (+2.1 bcm y/y), which encouraged record February sendout of 7.1 bcm (+3.8 bcm y/y), with LNG stocks being more actively drawn down. With port receipts still looking solid for the rest of March, there are few signs that the trend of higher LNG receipts is coming to an end.
In terms of our global balances, we still see healthy LNG supply numbers for Q2 19, up by 7 bcm y/y. We think Q3 19 increments will be lower q/q, despite some new LNG trains coming online, but we still forecast around 3 bcm of additional supply y/y over that quarter. These forecasts are cautious on LNG supply growth and so we see more upside to imports than downside, having been revised lower on expectations of new train delays and given guidance from Cheniere that summer maintenance will be relatively heavy at Sabine Pass. We also expect buying interest to increase during the summer months on higher Asian LNG demand, both for meeting peak summer demand and for filling LNG tanks and floating storage in the run-up to winter 2019/20.
The biggest increase in LNG sendout came from the UK (+1.0 bcm y/y), helped by the consistently positive NBP basis to the TTF. The UK received 4.9 bcm more LNG y/y over October 2018 to February 2019, while solid increases in sendout occurred in France (+0.97 bcm y/y), the Netherlands (+0.7 bcm y/y) and Italy (+0.5 bcm y/y). Even Spanish LNG sendout, which over the winter has lagged the increases in NW European markets, saw an uptick of 0.3 bcm y/y in February. The fact that incremental LNG has been arriving into both the UK and the Netherlands, despite the price spreads just favouring the NBP, means both markets should expect incremental LNG supply this summer.
|Fig 1: Aggregate European sendout, y/y, bcm||Fig 2: Index of TTF prices to Brent|
|Source: System operators, Energy Aspects||Note: Indexed so that January 2017 prices = 100
Source: Enagas, Refinitiv, Energy Aspects
Pipes sensitive to demand
While incremental LNG is landing in Europe largely due to a combination of buoyant global supply and tepid global demand, European gas imports via pipeline from Russia have largely been maintained. Despite February’s incredibly mild weather, Russian flows only came off by 0.13 bcm (1%) y/y to 12.6 bcm. Most pipe routes from Russian posted modest y/y gains, with the biggest reductions through Romania (-1.17 bcm) for supply to the south and Kondratki (-0.23 bcm y/y). Since October 2017, Russian flows of gas through Romania have fallen y/y in all but three months, as Romania has seen a combination of increased domestic production and imports from neighbouring markets hubs.
Russian flows, like those from Algeria, could see weaker demand from Europe as customer nominations under long-term contracts will ease off on the expected lower need for storage injections. We note long-term Russian gas is now largely hub-indexed, while downside tolerances to annual contract quantities (ACQ) have been largely eliminated. However, as we have argued before, Russian exports have upside tolerances above the ACQ, and we think that exports to the EU of 166 bcm in gas year October 2017 to September 2018 were nearing the top of those tolerances. As such, we think there is some downside to Russian imports, particularly as European buyers are going to have less appetite for gas y/y.
How much less demand for Russian gas is obviously the question, and that has to be considered alongside Gazprom Export’s newfound desire to sell gas into the market through its ESP. Over winter 2018/19, Gazprom’s sales on the ESP have expanded, with sales in January of 0.65 bcm and February beating that at 0.73 bcm. While sales in Q4 18 were mostly for M+1 delivery, sales in Q1 19 have broadened to include delivery at the front of the prompt (within-day and D+1). Without the short-term sales, Russian gas supply into the EU would have dropped in February by closer to 1 bcm y/y. Given the need for expected oversupplied European markets to balance, we think that Russian pipeline imports could drop by 0.2 bcm y/y in March and by 0.75 bcm y/y in April, two months which posted significant gains (27% and 12%, respectively) in 2018. We expect Russian imports to fall by 3.0 bcm y/y over all of summer 2019.
With regards to Algerian exports into Europe, we have seen a steady y/y decline into Spain and Italy since the start of this winter. Flows into Italy have been volatile over the last few years, although some of that was tied to supply disruptions due to the long-term outage of a train at the In Amenas gas processing plant in Algeria. More recently, the 2018 renegotiation of the supply contract between Sonatrach and ENI did conclude with ENI stating that the actual volumes it would import depend on the competitiveness of Algerian gas. That was a statement open to interpretation, but we believe it meant that ENI did not get to shift contract prices from being oil-indexed to gas hub-indexed, although did get more downside flexibility in the take-or-pay element of the contract. Over the last 12 months, Italian imports of Algerian gas have fallen by 2.9 bcm y/y, with only three of those months logging y/y increases. Over that period, total supply into the Italian market has been flat, as LNG has added 1.3 Mt y/y and European pipeline supply has added the same. Since October 2018, Algerian gas has consistently fallen y/y, by 2.15 bcm y/y in the first five months of this winter and falling by a considerable 0.8 bcm y/y in February.
The only possible upside will come from oil prices. The fall in oil prices in Q4 18 is starting to be reflected in oil-indexed gas prices, given the typical five-month lag in oil prices filtering through to those gas contracts. Having said that, the low prices at gas hubs will likely keep any oil-indexed gas out of the money. This is important for Spain, which has seen less volatility in its Algerian imports than Italy, since it has not agreed as much flexibility as ENI. However, since October 2018, every month of the current winter has involved a y/y fall in Algerian imports. Over October 2018 to February, Spanish imports of Algerian gas have fallen by 1.9 bcm y/y, with 0.57 bcm of a drop just in February. While part of that is due to an underlying reduction in gas demand y/y, it did occur at the same time as a growth in imports from France (+0.9 bcm y/y) since 1 November, when the French hubs unified and provided lower-priced French gas at the Spanish border. LNG imports have also risen, albeit only by 0.2 bcm y/y over the same period. Given this, we expect some crowding out of Algerian flows across the summer due to lower global gas prices.
Given the above, we see this summer maintaining the recent downward trajectory of Algerian exports into Europe, shedding some 5.2 bcm y/y across Spain and Italy.