Italian gas demand plunges on Coronavirus-led restrictions

LONDON (ICIS)–The coronavirus outbreak took a toll on Italian gas demand in week 11 as the government extended nationwide restrictions against the spread of the virus.

If restrictions continue, demand and gas prices are likely to fall further as warmer temperatures follow spring, pressuring consumption for heating. Power prices are also expected to plunge on the back of weaker gas. Gas is Italy’s main source for power generation and the marginal fuel, therefore a price maker for Italian power.

Lower demand put pressure on PSV short-term contracts, with the PSV Day-ahead falling to €10.50/MWh on Thursday, the lowest since ICIS started assessing the contract in 2009.

The Italian prime minister Giuseppe Conte approved a decree that forced bars, restaurants, shops and other small businesses to shut down from 10 March. People are currently allowed to leave their houses only to go to work, unless they can work from home, to shop for food, or if they require medical attention.

This took a toll on demand. Consumption dropped throughout the second part of week 11 and was expected to total only 210 million cubic metres (mcm) on Friday, down by 16mcm day on day, based on hourly forecasts published by Italian TSO Snam Rete Gas at 12:00 London time. This was 73mcm less than the average during working days in March before the restrictions came into force. The sector that includes domestic users and small businesses took the biggest hit followed by the power sector. Industrial demand, which accounted for around 18% of overall consumption, remained relatively stable as large industries continued to run their activities.

LIMITED FLEXIBILITY

Storage capacity holders reacted to the fall in demand by reducing withdrawals to a minimum in an attempt to reduce the system’s oversupply. Shippers also cut all short-term imports via pipeline as the price incentive vanished, however imports linked to long-term take-or-pay contracts from north and east Europe continued to flow into the Italian grid.

On Friday shippers nominated 95mcm of imports from Austria to Italy, despite the PSV Day-ahead trading at a discount to the Austrian VTP from Wednesday.

Italian storage sites, which are currently less than 25% full, will offer shippers limited opportunities to absorb oversupply. Storage systems, which are for the great majority managed by operator Stogit, are only allowed to switch to net injections from 1 April based on Italian regulation.

This is likely to further pressure PSV short-term contracts in the sessions ahead.

Heating-related demand, which is currently a major driver of domestic demand, is also expected to phase out as temperatures get milder, which would add to the bearish picture.

SUMMER ‘20 CRUMBLES

The bearish sentiment extended also to the near curve, with the front quarter and front season shedding value in the past few sessions.

The Summer ‘20 product was trading at a premium of only €1.60/MWh to the Dutch TTF on Friday morning, down from a premium of around €2.00/MWh on the day before the restrictions were applied.

Expectations that the front summer could post further losses if the virus continues to take a toll on demand could also limit the boost of liquidity on seasonal products which traditionally coincides with seasonal storage auctions in Italy. These will be held starting from week 12.

The price spread between summer and winter will make the auctions popular, but traders may want to wait before covering their positions on Summer ’20 and may want to focus on balancing their positions in the shorter term.