PSV spot, which is the Italian wholesale natural gas contract for day-ahead delivery, extended its rally on Tuesday as grid system operator Snam said the gas balance in Italy was entering a pre-alert status on cold weather.
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PSV spot was trading at Eur35.525/MWh at 5:20 pm local time (1620 GMT), up Eur2.775 from Monday's assessment, which itself was 22% higher day on day.
The Ministry of Economic Development has declared an Early Warning level of the Emergency Plan in the Italian gas market, Snam said in a published statement on its website on Tuesday.
"Snam said the Italian gas situation is under a pre-alarm state, so it is already under observation of emergency as there is an ongoing shortage of gas," an Italy -based trader said.
"It also means Snam is not able to cover demand with conventional supplies," the trader said.
However, tight supplies may ease in the next two days as they are public holidays in Italy.
There are three levels of alert Snam issued in the event of cold snaps. The current "pre-alert" level that traders referred to was announced as an alert in the event of exceptional system conditions.
If the situation were to deteriorate, Snam would announce a "state of alarm," which would mean Snam had to use storage volumes that surpassed the daily maximum storage withdrawal rate.
The last condition would be an "emergency" status that Snam would use storage volumes above daily maximum withdrawal allowance for five consecutive days.
The maximum withdrawal storage rate in Italy over December 1-15 is 76.4 million cu m/d, with 10 million cu m withdrawal capacity sold via day-ahead auction, data from Snam's gas storage division Stogit showed.
This suggested that the maximum withdrawal capacity is around 86 million cu m. As temperatures in northern Italy remained below zero degrees Celsius, storage withdrawals in Italy touched 96 million cu m on Monday as demand surged.
Local distribution zone or residential demand surged to 209 million cu m Monday, the highest since January, after averaging 178 million cu m/d in Week 48, data from Platts Analytics' Eclipse Energy showed. Gas -to-power demand also rose to 94 million cu m.
Despite increased Italian demand, Algerian flows to Italy remained flat at 63 million cu m on Monday.
Algeria has been hit by a cold snap in recent days, with temperatures 3-5 C below seasonal norms in the key demand centers such as Algiers, which has triggered increased domestic demand for gas and power.
Sonatrach could not be reached for comment on whether it had been unable to increase exports because of domestic demand.
The supply crunch comes as Algeria vowed to maintain its export levels through the winter and follows the startup last month of a new associated gas production project at the Hassi Messaoud oil field.
The project means associated gas that before now was mostly converted into LPG can be sent into the main Algerian gas grid.
The project started up at a rate of 10 million cu m/d -- the equivalent of 3.7 Bcm/year -- but can be increased to 20 million cu m/d if needed.
To offset flat Algerian gas flows to Italy, Russian gas flows to Italy via Austria ramped up to 110 million cu m Monday, after averaging 102 million cu m/d in Week 48.
LNG gasification to grid in Italy also ramped up to 12.8 million cu m Monday as the supply tightened.
However, northwestern European gas flows to Italy via Switzerland onlly imported 30 million cu m Monday, despite the gas flows via entry Wallback and Oltingues saw 49 million cu m, which was close to the maximum available capacity, due to high gas consumption in Switzerland.
Italian spot gas price jump not attracting more LNG
The jump in the Italian spot price took it way above the LNG Japan -Korea Marker, suggesting that Italy might attract LNG cargoes from the US, Middle East and Nigeria.
Italian spot gas surged to $11.382/MMBtu on Monday, way above the US, Middle East, and Nigeria LNG break even prices at $8.90/MMBtu, $10/MMBtu, and $8.78/MMBtu, respectively.
However, although Italian spot gas price became attractive, only two tankers with 90 million cu m capacity each tanker arrived at Italian LNG terminal the end of this week, according to Platts Analytics' data.
Both cargoes came from Qatar. There were no more cargoes ordered.
This is because "at this point demand will be for the very prompt, and it's hard to make firm bids and offers, given where Asia is priced right now.
"While prices in Europe are bullish, some markets are more accessible than others," an LNG trader said.