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Weekly Natural Gas, Power and Coal Market Recap

PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending 12/29/13

NYC-based PIRA Energy Group believes that a tightening LNG market is in need of new supply. A backwardated forward price curve will provide an incentive to continue faster year-on-year stock draws, and Canadian production is expected to trend higher. The focus of the European gas market will continue to shift from what supply can be provided to what supply can be taken away. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Tightening LNG Market Is in Need of New Supply

A tightening LNG market is in need of some new supply, but such supply will be scant in the year to come. Over the past 12 months, 11 new LNG import terminals have opened up around the world and while import capacity does not equal full utilization, many of these buyers are either starting to draw on previously signed contracts or the spot market, thereby tightening the pool of available supply from key swing producers such as Qatar or Nigeria. As for new supply, PIRA is showing three projects offering new LNG production in 2014.

More Canadian Supply to U.S. Ahead

The new year looks ready to begin with a triple-digit Canadian year-on-year storage shortfall. Not long ago, such a deficit would have evoked future bullish price optimism in western Canada, but no longer. A backwardated (i.e. downward sloping) forward price curve will provide an incentive to continue faster year-on-year stock draws, and Canadian production is expected to trend higher.

Focus Shifts to What Supply Can Be Taken Away

The focus of the European gas market will continue to shift from what supply can be provided to what supply can be taken away. The outlook for weather-sensitive gas demand has drastically shifted down from colder than normal in the first half of December to warmer than normal levels since then. Supply will need to be pulled off the market if spot prices expect to be supported at current levels. Additional losses in power sector gas demand are also occurring, due to a higher level of renewables and hydro output. Germany set a new renewables output record (as % of total demand) in late December, while Norwegian hydro levels have increased and added power supply to Continental markets.

NYC-based PIRA Energy Group reports that lower lignite generation prevents major price collapse in Germany. In the U.S., a continuation of colder than normal weather has lifted natural gas prices and drawn coal stocks to their lowest level in over three years. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Lower Lignite Generation Prevents Major Price Collapse in Germany

With renewable output's share of demand reaching a new historical maximum in Germany (roughly 51% of total average demand on Dec. 24), negative prices resurfaced in the German day ahead auction, although the magnitude of the negative spikes was much less pronounced than in prior years, thanks to lower generation from lignite plants. In spite of more evidence of supply discipline, upside for German prices remains extremely thin. Renewable generation remains a wild card.

U.S. Coal Stockpile Estimates

A continuation of colder than normal weather has lifted natural gas prices and drawn coal stocks to their lowest level in over three years. PIRA estimates that total U.S. electric power sector (EPS) coal inventories will reach 145 MMst by months’ end. This reflects 57 days of forward demand (versus 77 days one year ago).

Import Volumes Growing on a Controlled Predictable Program

China LNG import volumes last month clearly illustrate the paradox of rapidly expanding LNG import infrastructure interacting with the heavily controlled nature of the purchasing process by the government. Even though import volumes are clearly growing at a rapid pace, they are growing on a controlled, more-or-less predictable program. This program favors volumes from contracted suppliers exclusively, even if it means paying more than available spot volumes at the given time or simply going without. It has little room — for the time being — for spot deals on the part of individual downstream buyers with equity stakes in the various import facilities who may be able to substitute a well priced LNG spot cargo for other higher priced fuels on a one-off basis. The one exception to this rule is extreme cold weather as in last December (of 2012), when Chinese buyers took in a record 8 spot LNG cargos. The weather has not been so cold this month to warrant such activity.

ENDS

The information above is part of PIRA Energy Group's weekly Energy Market Recap, which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.

Click here for additional information on PIRA’s global energy commodity market research services.

PIRA Energy Group

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