EU gas import data for April supported our expectations of how imports are going to play out this summer. While strong LNG supply (+6.2 bcm y/y) is largely a given for Q2 19, it is more uncertain how Russian and Algerian imports will fare. EU imports of Russian gas fell (-0.72 bcm y/y) in April, as we expected they would, with contract nominations dropping but being partially offset by sales on the Electronic Sales Platform (ESP). We expect that Russian gas supply must dip by at least 5 bcm y/y over the summer for the European market to balance. Algerian flows, an even bigger downward risk, also fell in April (-1.2 bcm y/y), again in line with our expected y/y summer season drop from this source, of at least 7.0 bcm y/y. We expect that the LNG market will add at least 16 bcm of supply y/y to the European balance over summer, so those drops in Russian and Algerian imports will be important for the EU gas market to balance.
Russian flows staying strong on ESP sales
One of the big questions for this summer concerns whether Russian flows will fall and help compensate for the looseness caused by more LNG supply and very high storage inventories y/y. April flows came largely in line with how we expect Russian flows are going to behave in the injection period—underlying nominations under contracted gas will have to naturally decline on the lower need for injections, while Gazprom will make up for some of that with sales on the ESP. In April, total Russian flows came off by 0.72 bcm (-5%) y/y to 14.2 bcm, which includes Gazprom selling 0.82 bcm for delivery into Europe under its ESP. The ESP sales in April continued the trend of increasing sequential supply that we have seen since the ESP sales started in October 2018, moving up by 80 mcm m/m. The continued sequential growth has shown no signs of abating as of yet, but if it does continue, we could see over 1 bcm per month of ESP sales be a reality come Q3 19.
Over April, the major pipeline routes from Russia posted only modest changes y/y, with flows through Germany down (-0.16 bcm y/y), while flows through Velke Kapusany were broadly flat (+10 mcm y/y). Continued reductions came from flows into Romania, which were down by 0.23 bcm y/y, although this was the smallest drop y/y since September 2018. The slowdown in the y/y drop was due to a reasonably low April 2018 base, which had seen flows come off by 0.46 bcm y/y. As indicated in previous reports, much of the softness in those Romanian flows is due to a fall in exports from Bulgaria to Turkey.
Romania has seen increased domestic production, while Turkey has seen imports of gas through the new Trans Anatolian Pipeline (TANAP) and an acceleration in LNG imports. Imports of LNG into Turkey were up by 0.12 bcm y/y in Q1 19. Even if we exclude the changes in imports through Romania, imports of Russian gas into major EU markets was down by 0.49 bcm y/y in April.
Given the sequential increases in ESP sales that could still be a feature of Q2 19, we expect to see selling on the ESP to the tune of 5-6 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, although our central case assumption remains a 10 bcm drop y/y. As such, we continue to expect a reduction in total Russian imports of 5 bcm y/y in summer 2019.
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 summer 2019. April exemplified those risks—Algerian exports fell by 0.75 bcm (-47%) y/y into Spain and by 0.43 bcm (-37%) y/y into Italy, a combined 1.18 bcm lower y/y. The drop was lower than in March (-2.67 bcm y/y), although that reflects the lower base in Q2 18 compared to Q1 18.
The Spanish figure does come against total supply increasing by 0.26 bcm y/y, with Algerian flows being replaced by LNG supply (+0.62 bcm y/y) and imports from France (+0.24 bcm y/y), with the latter being linked to PEG and so tied closer to the TTF benchmark reflecting European market weakness.
The Italian import figure does come against a background of a colder April y/y (HDDs +75% y/y). Total supply into the Italian market was 0.69 bcm higher y/y on more res-com and power demand. Algerian gas was also crowded out from the Italian market. The increases in supply came from LNG imports (+0.56 bcm y/y), an increase in TTF-linked flows through Switzerland (+0.34 bcm y/y) and a surprise increase in Libyan gas imports (+0.48 bcm y/y), albeit from a base of near zero.
Last month, we were forecasting that Algerian exports to Europe would fall by 7 bcm y/y over the summer, and volumes are on their way to achieving that even though underlying gas demand in both Italy and Spain was higher y/y.
LNG imports - relentless
European LNG port receipts in April continued at elevated levels, of 10.2 bcm (+5.8 bcm y/y), which encouraged sendout of 10.3 bcm (+6.2 bcm y/y, +150%), taking LNG stocks down by 0.1 bcm m/m. Port receipts have been solid at the start of May, 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 continue to expect healthy LNG supply in Q2 19. Our forecast has been revised higher to now suggest LNG supply into Europe will be up by 16 bcm y/y (from just over 14 bcm y/y last month), largely on LNG production in April being even higher than expected. General maintenance on LNG supply trains across the summer is baked into that forecast and we 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 are forecasting a reasonably conservative 5 bcm of additional LNG supply for Europe y/y in Q3 19. We also expect buying interest in LNG to increase during the summer on higher Asian LNG demand, both for meeting peak summer demand and for filling LNG tanks and floating storage for the forthcoming winter 2018-19 period.
In April, the biggest increase in LNG sendout occurred in France (+1.9 bcm y/y), helped by the consistently positive PEG basis to the TTF. Solid increases in sendout also occurred in the UK (+1.5 bcm y/y) and the Netherlands (+0.9 bcm y/y). In the southern European markets, Iberian LNG sendout posted another y/y rise, of 0.81 bcm, while Italian sendout also increased (+0.56 bcm y/y). April was another month where there was a wide range of destinations for the incremental LNG, with all of the EU’s regas capacity 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, y/y, bcm||Fig 2: Gazprom short-term exports, bcm|
|Source: System operators, Energy Aspects||Source: Gazprom Export, Energy Aspects|