PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending October 27th, 2013

Share Article

European LNG Needs Play Central Role in Asian Spot Pricing This Winter, while New Plants Testings Pose Bearish Risks for Prices

PIRA Energy Group

PIRA Energy Group

PIRA’s gas balances for the 2013-2014 heating season have a decidedly bearish flavor. For the most intensive demand period, December through February, higher year-on-year Henry Hub prices should lead to sizable reductions in gas-fired electric generation.

NYC-based PIRA Energy Group believes that European LNG needs play a central role in Asian spot pricing this winter. In the U.S., slower storage draws in the upcoming heating season. Asian demand was revised higher for the fourth quarter. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

European LNG Needs Play Central Role in Asian Spot Pricing This Winter

Having enough spot supply this winter is becoming more and more predicated on Europe not needing its contracted LNG to balance. This assumption is far from a sure thing, as a significant disruption in spot price stability in the global gas trade is as close as a few more heating degree days (HDDs) above normal or a cold snap. PIRA's 10-day outlook for European daily demand is moving from severely below normal to near normal by the beginning of November, however, this move towards normal seasonal demand is not enough to send out the clarion call for Europe's contracted LNG to come home after being abroad for the better part of 2013.

Slower Storage Draws in the Upcoming Heating Season

PIRA’s gas balances for the 2013-2014 heating season have a decidedly bearish flavor. For the most intensive demand period, December through February, higher year-on-year Henry Hub prices should lead to sizable reductions in gas-fired electric generation. Coupled with a Lower 48 production upsurge, PIRA’s winter balances cause the expected end-October 2013 storage deficit to reverse into a year-on-year surplus by the end of 1Q14 if weather is normal and domestic supply is not seriously disrupted by well freeze-offs.

Asian Demand Revised Higher for the Fourth Quarter

PIRA has revised upwards the 4Q/1Q winter outlook for Asian demand. The slight increase projects supply additions stemming from a continued flow of diverted and re-exported European cargos meeting higher demand from Korea and China. Both countries stand eager to take in underlying growth volumes, and that’s even before the weather effect kicks in.

Alberta’s Gas Renaissance

The Duvernay, and other formations within Alberta’s Deep Basin, have not only revitalized current activity levels, but also pose tremendous upside potential going forward. While flat to higher year-on-year prices will limit Alberta’s gas production declines in the short term, a lack of outlets for new Canadian supply will constrain the development of the province’s gas resources for now. But PIRA expects to see sustained gas production growth in the province once Canada begins exporting LNG off the west coast later this decade.

NYC-based PIRA Energy Group believes that new plants testings pose bearish risks for prices. In the U.S., coal trading activity is magnifying the bullish run in deferred pricing. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

New Plants Testings Pose Bearish Risks for Prices

Several new German coal-fired units have entered a commissioning stage, which is to say that plants are likely to undertake tests. The output fed into the public grid as a result of such tests, may cause price responses that go beyond the fundamental picture. In fact, the output generated during this commissioning stage could be quite lethal for day ahead prices, especially since these plants are generally not ramping up and down in response to fossil fuel needs.

Coal Trading Activity Magnifying Bullish Run in Deferred Pricing

The rise in Atlantic Basin seaborne coal prices, particularly those of API#4 (South Africa), continued last week despite some profit taking on Friday. As a result of the surge in 4Q13 API#4 prices, the South African index is now pricing at a premium to both API#2 (Northwest Europe) and FOB Newcastle (Australia), a notable change from the discount realized just one month ago. While coal fundamentals have strengthened in the past several weeks, the rise in API#4 relative to other pricing points has more to do with a trading squeeze than coal fundamentals.

U.S. Coal Stockpile Estimates

U.S. coal inventories rose seasonally in October and are estimated to be 163 MMst as stocks grew in most regions. While growth in coal burn has slowed the back half of this year recent weather related production/transportation difficulties are impacting near-term supply as well. Weakness in power loads and weather-gas price relationships will be pivotal looking forward.

Cape Rates Fall Back, but are Expected to Rise Again before Year-End

Cape trip charter freight rates have slipped back after surging in September due to an extended South American grain season and ships ballasting back to the Atlantic for the start of the North American grain season. Growing iron ore production is being offset by record high imports into China. PIRA expects Cape rates to rally again before end-year, as well as later in 2014, but to weaken sharply in 1H14 as iron ore supply disruptions will hit Australia and Brazil.

Lower Russian Gas Prices Motivate Ukraine to Reduce European Gas Imports

In August, Ukraine received a little more than 2.6-bcm of natural gas from Russia, while from Europe, Ukraine were supplied a little more than 244-mmcm of gas. Over the last few months the average delivered price differential between Russian and European gas has substantially narrowed. With this in mind, Ukraine suspended imports of European sourced natural gas via Poland in October and reduced by half imports via Hungary – all as a result of Russia lowering its gas supply prices.

If Russian Production Peaks Now, What Happens Later?

Surging Russian gas production remains the fundamental factor of note in the European gas balances, but catching up in significance is the colder than normal weather projection creeping into the outer reaches of PIRA 10-day daily demand outlook. Russian gas production is now close to 2.1-bcm/d, which is usually only common in late December to mid-February and even then, such levels typically require colder than normal weather in Europe, Russia, or both.

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
sales (at) pira (dot) com

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Media Relations
PIRA Energy Group
+1 (646) 448-6395
Email >
Visit website