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Spanish pipeline gas supply uncertainty could lure premium LNG cargoes in winter

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Spanish pipeline gas supply uncertainty could lure premium LNG cargoes in winter

Highlights

PVB-TTF differential widens over course of the week

Inventories sufficient for now after GME news: trader

Spanish natural gas prices could find support heading into winter, providing incentives for spot LNG deliveries even with premiums that have been limiting European cargoes overall, after importers nominated zero Algerian supplies for November through the GME pipeline through Morocco.

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The differential between the S&P Global Platts PVB and Dutch TTF for November has increased in recent days, reaching 59.7 cents/MMBtu Oct. 21 compared with 15 cents/MMBtu earlier in the week.

Because the pipeline news raises the possibility of a non-renewal of the GME transit contract between Algeria and Spain that is scheduled to expire at the end of October, there is an added degree of risk premium to the PVB hub this winter given the reduction in pipeline import capacity and supply diversification as a result.

But the impact on Spanish fundamentals was expected to be muted, according to Platts Analytics, given the spare liquefaction capacity held by Algeria, and abundant regasification capacity in Spain. Stronger LNG deliveries also would help ensure demand is satisfied and contractual commitments are met.

While prices for LNG deliveries into Europe and Asia have moderated since record highs seen earlier in October, they are still up significantly compared with a year ago amid a surge in shipping rates and strong demand, altering trade flows as buyers seek better options.

LNG market participants were taking a wait-and-see approach to the uncertainty over Spanish gas pipeline imports heading into winter.

"Inventory [in Spain] looks comfortable for now. I think it's one to watch but probably no panic," said a European-based trader.

It's possible other African volumes could alleviate any supply issues, owing to the gains in freight that have limited some Atlantic sellers' access to the Asia market, sources said.

According to Platts prices Oct. 20, the Nigeria-to-West India freight cost came to $3.65/MMBtu, compared with a cost of $2.11/MMBtu to Spain.

"It really depends on the supply contract [from Algeria], but they definitely have the capability to send LNG to Spain, enough freight length," said another LNG trader.

The second trader said the bid would need to increase in Spain regardless of PVB movements, owing to recent prices heard from Botas across the Mediterranean in Turkey. Botas was heard to be entertaining offers up to and more than TTF plus 40 cents/MMBtu for spot volumes through a recent tender.

Algeria, meanwhile, has previously said it can meet Spanish gas demand using only its direct subsea Medgaz line and LNG deliveries.

Volume nominated through the Medgaz link has been scheduled at 7 TWh (0.6 Bcm) for November, said gas grid operator Enagas.

The GME pipeline already transited 5.54 Bcm of Algerian gas through Morocco to Spain from January through September 2021 — an average of 20 million cubic meters/day — Platts Analytics data showed. That is about 25% of Spain's annual gas demand.