Storage tanks in Europe are brimming with cheap LNG

By Anna Shiryaevskaya on 8/22/2019

LONDON (Bloomberg) - Spain is importing near-record levels of liquefied natural gas as persistent heat boosts cooling demand and depletes the amount of water available for hydropower generation.

With prices for the fuel near their lowest in three years, traders may also be betting on a recovery by filling up LNG storage sites in the nation, which account for almost a third of Europe’s total capacity. Shippers are continuing to buy gas despite the tanks being almost full.

LNG inventories are above 5-year average for time of year

It’s another example of how gas storage tanks are filling up across the continent to reach peak levels way before heating demand kicks in. That leaves a bigger-than-usual buffer for potential shocks in the winter, increases trading opportunities for when prices rise and raises questions about whether Europe can absorb all the gas that’s flowing in.

“Northwest Europe has had most of the gains in LNG deliveries this year owing to the ability to sell cargoes into highly liquid markets,” said Leyra Fernandez Diaz, a gas analyst at Energy Aspects Ltd. “But the physical options to absorb more gas in the power sector, turn down Algerian receipts and use more of the country’s spare LNG terminal capacity have allowed Spain to act as a considerable LNG sink as well.”

Spanish gas demand increased 43% in the first 19 days of this month, compared with the same period of last year. That’s in part due to above-normal temperatures this summer and hydropower reserves about 17% below their 10-year median.

Lower spot LNG prices allowed Spain to boost gas power use, contributing to a considerable coal-to-gas switch, Fernandez Diaz said. Spanish buyers were also able to reduce Algerian pipeline supply, which is linked to oil prices and is more expensive, she said.

To meet higher demand, 26 tankers are expected to unload in Spain this month, up from 16 in August last year and a record 30 in July. A lot of the increase was due to more tankers from Russia, which has now grabbed a 6% share of Spain’s total gas supply.

While Naturgy Energy Group SA has a long-term contract with the Yamal LNG project in the Russian Arctic that started last year, the country last month imported at least 3 more cargoes on a spot basis, according to Fauziah Marzuki, an LNG analyst at BloombergNEF.

That trend seems to be continuing with some of Yamal’s ice-class tankers, which are more expensive to operate than standard vessels, traveling more than two weeks to Sagunto, eastern Spain, data compiled by Bloomberg show. As of Tuesday, two cargoes with Yamal gas were en route to Spain, one on an ice-breaking ship and the other reloaded in Zeebrugge, Belgium.

Spain “has considerable LNG storage capacity and has been able to use this to absorb more LNG as prices have softened into the summer,” Fernandez Diaz said. “Reforms in place this year for using Spanish LNG infrastructure may also be encouraging firms to store more LNG at the terminals.”

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