Pipeline imports in May showed no signs of being turned down in response to high incremental LNG supply and the resulting lower-price environment. With an additional 6 bcm of LNG y/y set to arrive in Europe in Q3 19, pipeline supplies will come under greater pressure to slow from an increasingly bearish market. Russian pipeline imports rebounded in May on record sales on the Electronic Sales Platform (ESP) but nominations will need to fall by 2 bcm y/y in Q3 19 to respond to an oversupplied European market. A heavy slate of planned maintenance will aid a 4 bcm drop y/y in Norwegian production while lagged oil-indexed gas contracts will start reflecting Q1 19 gains in Brent, incentivising customers to curb nominations by 2.9 bcm y/y in Q3 19.
European gas prompt prices crashed in May as pipeline imports remained strong, with prices going below the 5% fuel switch trigger and headed towards the parity trigger as the market looked for more power sector demand. Gains in LNG supply continued, as expected, despite planned maintenance work curtailing regasification capacity during parts of the month, pushing aggregate sendout up y/y by a whopping 4.9 bcm. The influx of LNG has driven some of the region’s smallest terminals to run at or near full capacity, such as Gate, all three of Italy’s terminals, Sines and Swinoujscie.
The TTF dropped enough that the Jul-19 and Aug-19 TTF-Henry Hub arb closed, with a very real risk that the Sep-19 arb will eventually shut too and encourage unhedged cargoes to head elsewhere but Europe. Even with the weak pricing, we still expect LNG imports into Europe to climb by around 6 bcm y/y to 16.6 bcm in Q3 19, with limited downside risk as a closing of the Sep-19 arb would only affect the most marginal of cargoes. Considering the LNG market is a M+2 market, LNG lifting decisions for June and July have already been made, while cargoes for September delivery have had plenty of time previously to be hedged at a spread that covers variable costs and some part of the fixed costs.
As for pipe imports, flows from Russia in May broke the trend of lower exports y/y in the previous two months and that helped tip the market to its much looser state. Russian flows quickened in May by a hefty 1 bcm y/y. The increase in flows points to a very modest drop in nominations over the month and a very aggressive pattern of sales to protect Gazprom’s market share. Gazprom ESP sales climbed by 0.2 bcm m/m, reaching a record high of 1 bcm in May, as sales into German hubs were up by 0.3 bcm m/m at an all-time high of 0.7 bcm. We forecast that Russian flows will fall by 2 bcm y/y in Q3 19, as pipes flows will need to respond to lower prices. We estimate that the cost of getting Russian gas to the Slovakian border is about 9.8 €/MWh (3.2 $/mmbtu), so Gazprom is likely to be unlikely to want to sell on its ESP once prices drop below that level. Still, Gazprom seems keen to send out a clear message to LNG suppliers that it can push the market down and make Europe a pretty unattractive market for marginal cargoes.
Norway also strong, albeit on lighter maintenance y/y
Lighter maintenance constraints y/y in May allowed Norwegian pipeline imports to also quicken, adding to the woes of the European market. Norwegian flows totalled 8.91 bcm, slightly higher y/y by 0.08 bcm. May had 0.39 bcm less scheduled maintenance y/y, suggesting that production adjusted for maintenance was down over the month. While maintenance in June is set to be slightly higher y/y, maintenance outages are set to grow as Q3 19 progresses, to be 3.8 bcm higher y/y over the quarter. With there being little incentive to offset any reduction in supply with gas from more flexible fields given the low flat price and the high contango between summer 2019 and winter 19-20, we do see Norwegian flows coming off by around 4 bcm y/y over Q3 19. Most of the risk to those forecasts is to the upside due to potential new field production (Aasta Hansteen) coming to market.
|Fig 1: Gazprom Export short-term volumes, bcm||Fig 2: Gassco summer maintenance, mcm|
|Source: Gazprom Export, Energy Aspects||Source: Gassco, Energy Aspects|
Algerian reductions offset by higher Libyan flows
While North African imports did slow y/y in May, flows only stepped down by 0.4 bcm, much less than our predicted 1.3 bcm drop y/y. Spain reduced its imports from Algeria mostly in line with our expectations of 0.6 bcm y/y, with the lost supply mostly offset by quicker LNG imports. A tighter balance in Italy, however, drove a 0.2 bcm increase y/y in imports from North Africa. Cold weather boosted demand while gas-fired generation also gained share in the Italian thermal power mix. Heavy planned pipe maintenance limited flows at Passo Gries, and with LNG terminals in Italy already running near capacity (+0.3 bcm y/y), the Italian market was not able to reduce Algerian flows by the same magnitude as in previous months. Italian imports from Libya gained by 0.3 bcm y/y, as expected, due to a low May 2018 base as an unplanned outage significantly reduced flows last year. Italian imports of Algerian gas, which have dropped by 0.8 bcm y/y on average each month since the start of the year, were only 90 mcm lower y/y in May. Maintenance constraints affecting Italian imports of TTF-linked gas through Passo Gries are now scheduled to be lighter y/y until September, which will accelerate the curbing of oil-linked imports of Algerian gas. Additionally, as lagged oil-linked North African gas prices begin to reflect the Q1 19 gains in Brent, and European gas hubs continue to weaken, customers will turn down their nominations of Algerian gas. We expect North African pipeline imports into Europe to shrink by 2.9 bcm y/y in Q3 19.
The loose European balances that have characterised the market this summer will continue into Q4 19, with storage sites forecast to start the winter full of gas and LNG supply set to be up by 7 bcm y/y. Pipeline imports will continue to be under pressure to fall and we forecast North African imports to drop by 2.3 bcm y/y, followed by around a 1.1 bcm drop in Russian imports. Production from new fields will boost Norwegian pipeline imports by 0.6 bcm y/y over Q4 19. The outlook for Q1 20 is more complex, with delays to the start-up of Nord Stream 2 looking inevitable and the risk of a cessation of Russian gas transiting Ukraine adding significant risks to how supply is going to develop (see Europe Outlook: Russian Roulette, 16 May 2019).