PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap

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North American Gas Fundamentals Still Look Constructive, Assuming Heating Season Weather is Close to Normal

PIRA Energy Group
The weather stakes are suddenly getting much higher, and the expectation of a very mild early December is not what those bulls want to hear.

NYC-based PIRA Energy Group believes that North American gas fundamentals still look constructive, provided heating season weather is close to normal. U.S. gas stocks built on the week, surprising markets. North American spot on-peak power prices declined at western hubs. The global seaborne coal market rallied in the Pacific Basin this month, erasing sizeable October losses. Specifically, PIRA’s analysis of gas, power, coal market fundamentals has revealed the following:

*Natural Gas Fundamentals Still Look Constructive, if Heating Season Weather is Close to Normal
From a gas bull’s perspective, relatively normal November heating loads have been a welcome change from a year ago, and will soon help turn the longstanding storage surplus into a deficit. However, the weather stakes are suddenly getting much higher, and the expectation of a very mild early December is not what those bulls want to hear. Yet no one is arguing that another “winter that wasn’t” looms ahead. In a heating season with relatively normal weather, gas fundamentals still look decidedly constructive.

*Natural Gas Demand Prospects Skewed in Favor of Strong Growth
Despite the prediction of a warming trend in the U.S. through mid-December, gas demand prospects are still skewed in favor of strong growth, particularly in the Midwest and Northeast, even if gas-weighted heating degree days for the month come in below normal. Basis across the demand centers of western North America is likely to encounter resistance in the near term. Beyond the region’s storage surplus, WECC’s reliance on gas-fired electricity generation is anticipated to continue easing. In addition, temperature forecasts are also suggesting the continuation of relatively milder conditions in the West relative to the East.

*U.S. Nat Gas Stocks Build Week on Week, Surprising Market
Following back-to-back weekly net storage draws, the market had widely anticipated another draw for the week ending November 23. However, the EIA reported a net stock build, which indicated a steep week-on-week decline in demand that could be largely attributed to warmer weather and the Thanksgiving holiday. Outside a brief cold snap in the eastern U.S., temperatures were much above normal across most of the country, resulting in a week-on-week decrease in gas heating demand for the combined residential/commercial and industrial markets. Gas-fired electricity generation demand declined to the lowest level in about a year.

*News of Incremental LNG Supply Loosens Balances
Global LNG balances are beginning to loosen up with news of incremental supply restarting in Norway, Nigeria, and Indonesia in mid-December. Tanker flows also show much higher Qatari volumes coming out of the Gulf, with a heavy tilt towards Asia. Northwest Europe is starting to see its send-out rise, as NBP prices have climbed high enough to provide a better netback than Asia for many Atlantic Basin spot cargos. Spot prices in Europe are close enough to the low end of the European contract gas price band to make spot cargo purchases a more enticing option.

*Spot On-Peak North American Power Prices Decline M/M at Western Power Hubs
In November, spot on-peak power prices power hubs in western North America eased relative to October, as loads declined and hydro and nuclear output rebounded. Year-on-year, prices were mixed, with California hubs recording gains while other markets weakened. Off-peak prices were mixed month-on-month. Spreads between California and both Northwest and inland Southwest markets remained wide, near October levels and up sharply from 2011.

*Pacific Basin Seaborne Coal Rally Erases October Losses
In the Pacific Basin the global seaborne coal market rallied this month, erasing sizeable October losses. PIRA views 1Q13 as a critical time for the market, with heavy seasonal coal demand globally, plus structural increases in Chinese coal demand, and firmer Australian supply tightening balances. In the Atlantic Basin, while there is little downside for CIF ARA (Northwest Europe) pricing in the very short term, a sizeable downshift in European coal demand in 2013 due to weak electricity loads, continued renewable penetration, and coal-fired capacity closures offers significant headwinds for coal pricing in the balance of 2013.

*Cape Rates Appear to Be on Hold
PIRA’s comparison of daily Cape tripcharter rates over the last three years shows Cape rates leveling off this month at broadly where PIRA expected. In December 2011 the Cape average continued to climb, while in 2010, rates were on the slide. For the moment this year, the market appears to be on hold. However, there are some signs that Chinese interest in iron ore cargoes is beginning to wane, given the lack of any strong stimulus measures emerging from the new Chinese leadership.

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
3 Park Avenue, 26th Floor
New York, NY 10016
212-686-6808
jsteele(at)pira(dot)com

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