Spain and Italy, normally the most expensive gas markets in Europe, have been trading far below US and Middle Eastern LNG netbacks, the theoretical breakeven points, since a price hike on the JKM prompt saw it shoot up $1 to around $11.50/MMBtu Thursday.
Spanish PVB seen exposed to upside risk on heatwave
JKM large increase makes Europe unattractive
Spain flips to premium to Italian PSV as Brent pressures Italy
Therefore if gas-for-power demand surges due to heatwaves this summer, prices could see significant up-swings to attract additional LNG, with the Spanish PVB seen more exposed than Italy.
The estimated US LNG breakeven price of $9.95/MMBtu is currently well above the Italian PSV price for July delivery of almost $8.213/MMBtu, and the Spanish PVB equivalent of $8.409/MMBtu, according to S&P Global Platts pricing data.
Platts Analytics data estimates that a heatwave could increase gas-to-power demand in Spain to 30-40 million cu/d as seen in previous heatwaves, compared with a June average of 15 million cu m/d, bringing higher LNG send-outs as pipeline flows are topped and possibly prompt Spanish PVB prices to jump to compete with much higher prices in Asia to attract additional LNG cargoes.
In Italy, previous heatwaves have seen gas-for-power demand rise to 70-90 million cu m/d compared with a June average of 50 million cu m/d.
Injection demand is also a concern. The injection period is underway until October and gas stocks in Spain are below last year's levels at 62% full compared to 67%. Thus any increase in demand over the summer from the gas-to-power sector will compete with storage injection demand.
Spanish gas pipeline systems are running at seasonal levels and close to full capacity, with only 26 million cu/d left to reach full capacity.
Latest Algerian flows were seen at 49 million cu m/d out of the total 66 million cu m/d, while French were seen at 11 million cu m/d out of the 20 million cu m/d.
A sharp increase in JKM, the international benchmark for LNG, has rendered Southern European gas markets unattractive for both US and Middle Eastern LNG cargoes.
JKM prices have risen sharply due to strong demand from Japan and South Korea amid supply worries. But they have eased slightly in previous sessions on Brent losses, with prices steady Tuesday.
The Spanish PVB month-ahead has already seen some support from the JKM price hike despite lower TTF and Brent futures, even bringing it to a premium to the PSV month-ahead as of June 13. It has retained a premium of around 20 euro cent to Italy since.
An Italian gas trader said: "Pipelines are running at their current max levels" in part due to planned maintenance affecting pipelines through June and July.
However, the trader also said storage was "perfectly in line with June volume targets, so players don't seem worried about the current situation."
