PSV-TTF front month gas price spread to remain tight on strong LNG

LONDON (ICIS)–High LNG send-out into the grid is likely to keep the Italian PSV front month premium over its Dutch TTF equivalent tight until the end of the summer season.

According to LNG Edge, Italy received record-high LNG volume in June.

A trader said it is likely Italy will continue to attract LNG for the time being despite latest cancellations due to its favourable prices compared with other hubs.

This combines with fuller gas stocks year on year and slow recovery demand, which will apply further downward pressure to the Italian premium over the TTF market.

RECORD LOW PSV PREMIUM TO TTF

The PSV rolling front month premium over its TTF counterpart reached its second lowest value since the beginning of 2015, ICIS assessments showed.

The spread has shrunk since 29 June, falling well below the level considered profitable to imports gas from the northwest of Europe through the Transitgas pipeline given transportation costs.

Gas flows reaching Italy through that route accounted for around 20% of the total imports between January and June 2020, Italian grid operator Snam Rete Gasa data showed.

SLOW RECOVERY DEMAND

Since lockdown measures were eased in the country demand has struggled to return to pre-crisis levels.

Gas demand for the first 7 days of July was 23% above the same period in May but still 8% lower compared to the same period in 2019, Snam data showed.

Traders polled by ICIS expected demand to recover more significantly by the end of the year.

HYDRO TO EASE MARGINS

Italy is set for unseasonably high precipitation in July, according to MetDesk. This will boost hydro stocks and reduce demand from gas-fired power plants.

Gas demand from CCGTs will be further lower due to an increase in nuclear availability in France for the remainder of 2020. France is traditionally one of the largest sources of power imports for Italy.

FULLER STOCKS TO CAP DEMAND

Fuller gas stocks year on year are likely to apply further pressure on the front month premium over the TTF as it will likely mean limited demand for injections. Italian gas stocks were 74.7% full on 7 July, Italian grid operator Snam Rete Gas data showed. This was 10.3 percentage points higher year on year.

A market participant said that relatively more full gas stocks will likely remain a bearish factor for the Italian premium over the TTF for all monthly contracts with delivery in 2020.

LNG SENDOUT TO REMAIN STRONG

Italy imported 986,000 tonnes of LNG in June, the second highest behind Spain. The higher LNG imports to Italy in June were primarily driven by increased arrivals from Qatar, including a Q-Flex vessel, the 216,000cbm Tembek, which berthed at the Rovigo terminal on 23 June, according to LNG Edge.

A total of eight Qatari cargoes were delivered to Rovigo in June, up from six during May.

Moreover, Algerian spot cargo deliveries to the Panigaglia terminal also added to the high imports.

Seven vessels delivered cargoes from Algeria’s Arzew export plant to Italy’s Panigaglia import terminal during June and several could have come on a spot basis rather than through a long-term contract.

“A lot of these cargoes are awarded through first-come-first-served auctions that are really cheap”, an Italy-based source told ICIS, adding that these are likely to be cargoes sold on a DES basis to Italy by Algerian state-owned producer Sonatrach.

As a result of the low regasification cost, buyers in Italy are potentially looking at the spread between the PSV front month and spot LNG prices to Italy, the source said.

The spread between the PSV front-month contract and ICIS spot DES Italy LNG price averaged $0.74/MMBtu in the 1 April-29 May period.

Since the beginning of June, the spread has narrowed, averaging $0.25/MMBtu between 1 June and 7 July, but the PSV front month remained above the spot DES Italy LNG price.

This could continue to make Italy an attractive destination spot cargoes and favour LNG over pipeline supplies into the country.

With Algeria expected to keep offering cargoes on a bilateral basis, while another Q-Flex vessel from Qatar is set to unload at Rovigo on 8 July, high LNG imports are likely to persists in Italy. Additional reporting Daniel Stemler