PIRA Energy Group’s Weekly Natural Gas, Power, and Coal Market Recap for the Week Ending December 8.

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Israel will add new dimensions to the Mediterranean LNG trade in the coming weeks.

PIRA Energy Group
The resultant week-on-week increase in gas-weighted heating degree days bolstered residential/commercial heating loads. Gas-fired electricity generation also ramped up, largely thanks to Mother Nature, reversing the multi-week downtrend.

NYC-based PIRA Energy Group believes that Israel will add new dimensions to the Mediterranean LNG trade in the coming weeks. In the U.S., the weekly gas storage draw was larger than expected, while weaker oil and gas prices pushed coal prices lower on the week. In Europe, the declining role of gas-fired generation continued to ignite interesting discussions. Specifically, PIRA’s analysis of natural gas and power market fundamentals has revealed the following:

*PIRA's Natural Gas Producers Quarterly Earnings Call Shows Falloff in Drilling Activity
Gas drilling activity declined by upwards of 60% year-on-year, for the companies in PIRA’s Earnings Call Group, outpacing the 50% falloff for the market as a whole. Nevertheless, 14 of the 20 companies surveyed increased gas production year-on-year in 3Q12. Four of the top five producers in terms of growth have considerable positions in the Marcellus, which has been the largest driver of U.S. gas production growth lately. Moreover, only five had stock prices that were relatively strongly correlated with the Henry Hub 12-month strip, compared to more than half that had a moderate or very high correlation with the WTI 12-month strip.

*U.S. Weekly Gas Storage Draw Larger Than Expected
The EIA reported a larger-than-anticipated U.S. storage decline for the week ending November 30. Wintery weather came roaring back, albeit temporarily, across much of the eastern half of the country. The resultant week-on-week increase in gas-weighted heating degree days bolstered residential/commercial heating loads. Gas-fired electricity generation also ramped up, largely thanks to Mother Nature, reversing the multi-week downtrend.

*European Spot Natural Gas Prices Can Exceed Contract Gas Prices
PIRA believes that spot prices can be higher than contract gas prices for a sustainable period, given the amount of supply flexibility coming into the market in the past week. For the past few months, PIRA has emphasized the idea that spot price will move higher because the risks tied to a more concentrated supply network are actually greater than any threat coming from underlying demand growth. Weather-related demand increases change this equation a bit, but underlying gas demand has been severely eroded by renewables and the broader economy. This means that weather-related demand spikes are not as dire as in a pre-2009 world.

*Israel Adds New Dimensions to the Mediterranean LNG Trade
In the coming weeks, several new dimensions to the Mediterranean LNG trade will be added, when Israel joins Turkey and Greece via Cyprus as the newest eastern Mediterranean LNG buyer. The play is expected to be temporary, owing to domestic production potential from the offshore Tamar field as soon as 2Q13. Imminent Israeli purchasing will include Cyprus, which will serve as an offshore ship-to-ship transfer point for Israel-bound volumes, probably to mitigate political risks and reduce insurance costs.

*Declining Role of European Gas-Fired Generation Continues to Ignite Interesting Discussions
The declining role of gas-fired electricity generation within the European power fuel mix continues to ignite interesting discussions. German gas-fired dispatching set a ten-year low during November, and official figures from the German Statistical office show that output during the first nine months of the year was down significantly year-on-year. The emergence of colder weather in December has provided some stimulus to gas-fired output. Gas-fired units have been profitable for very few hours this year, confirming that even with colder weather (albeit below-trend macroeconomic growth), gas units were unable to influence the peak section of the curve.

*Coal Miner’s Blues
With weaker barge and rail loadings CAPP (Central Appalachian) coal pricing has seen little change in recent weeks. Both ILB (Illinois Basin) and Pitt 8 coal forwards have held fairly steady this past month. SPRB (Southern Powder River Basin) pricing has slid in recent weeks.

*Long-Term International Thermal Coal Trading
The international thermal coal market is trading well off its ten-year highs and lows. However, due to structural and cyclical cost pressures, current prices (netting back to the field) are bumping up against marginal production costs in several supply basins. Supply-side actions that are currently being taken will recalibrate short-term balances, but will have a resounding impact on medium-term pricing (two-seven years out).

*Weaker Oil and Gas Prices Push Coal Prices Lower
Weaker oil and gas prices pushed coal prices lower last week. The decline in coal pricing was particularly acute in the Atlantic Basin, with 1Q13 API#2 (Northwest Europe) and API#4 (South Africa) prices declining by more than FOB Newcastle (Australia) prices.

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) 542- 1677
info@pira.com

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