The very loose European gas market balances as we go into summer have shone a spotlight on pipeline imports and how they are going to react to the steady flow of LNG into the market. March import data has provided some clues, with strong LNG supply (+5.8 bcm y/y) coming up against steady Russian flows (+0.36 bcm y/y) but a massive reduction in Algerian imports into Europe (-2.67 bcm y/y). The strength in those LNG flows, and a loose global balance that will only slowly normalise as we move through the summer, suggests that LNG imports will be higher by 12 bcm y/y, a revision up from 10 bcm y/y on our previous forecast. To balance, there needs to be a joint reduction in Algerian and Russian flows of around 12 bcm y/y. We have revised our forecast for Algerian flows, to a 7.0 bcm drop y/y in summer 2019, from a 5.2 bcm decline y/y previously, and expect imports from Russia to fall by 5.0 bcm y/y, unchanged on our last outlook. If those drops fail to materialise, then summer looks even looser and LNG imports will have to be reduced.
Algerian imports – the big drop
Algeria is the source of imports that we have been suggesting is most at risk from reductions in nominations under long-term contracts. Over March, Algerian exports fell by 1.06 bcm (62%) into Spain and by 1.61 bcm (77%) y/y into Italy, a whopping combined 2.67 bcm lower y/y. The Italian import figure does come against a background of a mild March (HDDs down by 24% y/y). Total supply into the Italian market was 0.36 bcm lower y/y because of mild weather, so even if all of that fall came from Algeria, that would still be an underlying 1.2 bcm y/y reduction in Algerian flows due to higher LNG imports and more flows from Switzerland, the latter of which are purchased on a TTF basis. Spain was also mild (HDDs down by 19% y/y), but total supply there only dropped by 0.16 bcm y/y, so much of the y/y drop was Algerian flows being replaced by the increase in LNG supply (+0.49 bcm y/y) and imports from France (+0.34 bcm y/y), which are linked to PEG and so tied closer to the TTF.
As we mentioned last month, the only possible upside to imports from Algeria will come from oil prices. The fall in oil prices in Q4 18 will start to be reflected in oil-indexed gas prices, with a typical five-month lag. Oil-indexed gas prices should peak over March and April, before easing from May over the rest of summer. As such, it would make economic sense to reduce nominations now, and then take more gas later in the summer when those oil-indexed contract prices are lower. At the very least, the scale of the y/y reductions in imports from Algeria should begin to fall after April. Having said that, the fall in prices at gas hubs has far outpaced any reduction oil-indexed gas prices are likely to experience, so oil-indexed contracts will remain out of the money.
So, the question is just how much downside flexibility do Spain and Italy have under their long-term contracts with Algeria. As we argued last month, Italy is likely to have more room to manoeuvre than Spain, but y/y reductions from both countries should continue. Last month, we had been assuming that Algerian pipeline exports to Europe would fall by 5 bcm over summer 2019, but given the y/y reduction in March was half of that, 5 bcm now seem conservative. We have revised our forecast for Algerian exports to Europe to a 7 bcm y/y reduction.
Russian flows staying strong on ESP sales
Despite the y/y storage surplus and the strong rise in LNG sendout, European gas imports via pipelines from Russia remained relatively strong. Over March, Russian flows came off by 0.95 bcm (-6%) y/y to 14.4 bcm, which includes Gazprom selling 0.74 bcm for delivery into Europe under its Electronic Sales Platform (ESP). At first glance, this does suggest it was offsetting less than half of the reduction in nominations with spot sales.
However, the major pipeline routes from Russia posted only modest y/y changes, with flows through Germany down (-50 mcm y/y), while flows through Velke Kapusany were actually up (+0.74 bcm y/y). As we have seen through Q1 19, the biggest reductions came from flows into Romania, which were down by 1.3 bcm y/y in March and by 3.2 bcm y/y across Q1 19. Much of the softness in those Romanian flows is due to a drop in exports from Bulgaria to Turkey. 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, imports of gas through the new Trans Adriatic Pipeline (TAP) and, in Q1 19 in particular, an acceleration of imports via LNG. Imports of LNG into Turkey were up by 0.38 bcm y/y in January (the last month of full Turkish data available), while imports from Georgia were higher by 0.17 bcm y/y.
If we exclude the changes in imports through Romania, then imports of Russian gas into major EU markets was actually 0.36 bcm higher y/y in March, suggesting that Gazprom was more aggressive in its spot sales than actually required, in order to defend its existing market share in its key EU markets. How long that strategy holds is debateable, however, as the first week of April has seen a drop in Russian gas flows into the main EU markets (-1.9 bcm y/y). April should provide a key insight into how Gazprom intends to behave for the rest of the summer with regards to its market share. While we expect to see selling on the ESP to the tune of 4-5 bcm over the entire summer, the lower need for gas injections into storage will just naturally reduce customer nominations from the elevated levels in summer 2018, by as much as 15 bcm y/y. We expect a reduction in total Russian imports of 5 bcm y/y in summer 2019, which assumes an increase of sales on the ESP of 5 bcm y/y and a drop in nominations of 10 bcm y/y. While that does mean there is the potential for a large drop in Russian imports y/y, a big chunk of that will likely be seen in April and May, as these were the months last year with the largest injections into storage.
LNG keeps on giving
European LNG port receipts in March continued at elevated levels, of 9.4 bcm (+5.8 bcm y/y), which encouraged sendout in March of 9.5 bcm (+5.6 bcm y/y, 144%), leaving LNG stocks largely unchanged m/m. Port receipts have been solid at the start of April, as expected, suggesting there are few signs that the trend of higher LNG receipts y/y is coming to an end.
In terms of our global balances, we expect even healthier LNG supply in Q2 19. Our forecast has been revised higher to now suggest LNG supply into Europe will be up by 12 bcm y/y (from just over 10 bcm previously), largely on LNG production in Q1 19 surprising to the upside. General maintenance on LNG supply trains across the summer is baked into that forecast and we do think the y/y rise in supply to Europe in Q3 19 will be less extreme q/q, despite some new LNG trains set to come online, as the Asian cooling season will kick in and the main NE Asian buyers (China, Korea and Japan) will be looking to build stocks again in the run-up to winter 2019/20. We still forecast around 3 bcm of additional LNG supply for Europe y/y in Q3 19. We also expect buying interest in LNG 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 March, the biggest increase in LNG sendout occurred in France (+1.6 bcm y/y), helped by the consistently positive PEG basis to the TTF. Solid increases in sendout also occurred in the UK (+1.1 bcm y/y), and the Netherlands and Belgium (+0.8 bcm y/y each). In the southern European markets, Iberian LNG sendout posted its largest y/y rise of the last six months, adding 0.6 bcm y/y, while Italian sendout also rose by similar-sized increment. The wide range of destinations for the incremental LNG does suggest all of the EU’s regas capacity is getting called on to help absorb the global LNG surplus that we expect to persist for the next few months.
|Fig 1: European LNG sendout, change y/y, bcm||Fig 2: TTF-indexed vs Brent-indexed prices|
|Source: System operators, Energy Aspects||Source: Refinitiv, Energy Aspects|