LNG, higher stocks to limit Italian gas imports from north Europe

Marta Del Buono

21-May-2020

• PSV summer premium to TTF to discourage short-term imports from north Europe

• LNG sendout to remain strong

• Fuller gas stocks year on year to further pressure summer products

LONDON (ICIS)–The premium that Italian PSV products with delivery this summer hold over the Dutch TTF is unlikely to rise above the level that would make gas imports from northwest Europe profitable, as weak demand and robust LNG supply are expected to keep squeezing the spreads.

Strong LNG sendout has been a significant driver pressuring Italian gas products in past weeks, along with a slow recovery in gas demand after lockdown measures have been eased on 4 May.

Gas demand for the first two days of week 20 was just 4% higher compared to the first two days of week 18 when lockdown measures were still in place. On the contrary power demand during the same period increased by around 15%, data from grid operators Terna and Snam Rete Gas showed.

Fuller gas storage year on year is also set to reduce injection-related demand for the rest of summer. This is likely to further pressure PSV summer products.

PSV PREMIUM SHRINKS ON LNG

After the Adriatic LNG terminal announced on 11 May that the scheduled maintenance due in August was postponed, the PSV August ‘20 premium to the TTF shrank by 25%. The premium was at at €1.163/MWh on 19 May, ICIS assessments showed.

This compares with the spread that would cover capacity costs for short-term imports from north Europe through Switzerland, which is around €1.80/MWh. The route is traditionally the country’s marginal source of supply.

The front-month and front-quarter premium to the TTF also narrowed similarly as a slow recovery in demand suggested a lower need to import in the months ahead than previously expected.

LNG sendout is set to remain strong in Italy despite low demand. Market participants have limited opportunities to cancel LNG cargoes headed to Italy, as the majority of them is part of long-term agreements, according to multiple market sources.

STORAGE

Bearish gas prices have prompted shippers to inject more gas into stocks year on year in summer so far.

Italian gas storage sites were 51.8% full on 19 May, data from Snam Rete Gas showed. This was 14.5 percentage points higher compared to 2019. Fuller gas stocks year on year will mean less demand for injection going forward, further reducing the need to import from North Europe.

Pipeline exports to Italy in 2020 so far dropped by 10.5% compared to the same period in 2019 due to crumbling demand after the coronavirus outbreak.

ITALY TO KEEP LNG IMPORTS HIGH

The pressure of global LNG oversupply and eroding sales margins could mean around 2m tonnes of US LNG offtake has been cancelled, the majority for June loading.

As many as 14 US offtakers, including global portfolio sellers, European traders and Asian offtakers have cancelled cargoes for June loading or have placed them under serious consideration. Italian gas distribution company Enel has been identified by market sources as being among the companies to have cancelled cargo.

Some sources said that as many as a total of 30 cargoes have been cancelled.

US cargo cancellations and production shut-ins are widely seen as one way of balancing the global market.

Margins for US LNG sellers look set to continue to be eroded throughout the third quarter. European and Asian gas and LNG price premiums to the US Henry Hub are very low into July and August and only begin to make a clear improvement into the fourth quarter.

Despite cancellations, European importers such as Italy, UK, France and Spain will continue to take the excess cargoes created by the glut of volume in the global market, with sellers continuing to push those excess LNG cargoes to Europe, despite the slight resurgence of demand in Asia.

Italy has imported 3.4m tonnes of LNG so far this year, compared with 3.9m in January-May 2019, making it Europe’s fourth largest importer of LNG behind the UK, Spain and France, according to LNG Edge. Most of Italy’s imports come from Qatar, US, and Algeria.

Additional reporting by Ruth Liao

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