PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending February 10, 2013

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Europe’s Stricter LNG Diet to Continue while U.S. Coal Market Weakness Persists

PIRA Energy Group

PIRA Energy Group

Europe's stricter LNG diet will continue in the weeks and months ahead, creating additional supply for South American and Asian markets.

NYC-based PIRA Energy Group believes that Europe’s stricter LNG diet will continue in the weeks and months ahead. The loss of Egyptian and Nigerian LNG volumes will offer more price support in Asia than in Europe. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

*Europe's Stricter LNG Diet to Continue

Europe's stricter LNG diet will continue in the weeks and months ahead, creating additional supply for South American and Asian markets. Spanish buying patterns scheduled for February and March suggest another three to five cargos will be diverted relative to the amount seen since the beginning of October. Between now and the 2Q13, Spanish gas demand typically drops, which leads to cuts in imports.

*Will the Loss of Egyptian and Nigerian Volumes Offer Support in the Months Ahead?

One key question going forward is whether the loss of Egyptian and Nigerian volumes will eventually offer price support in the months ahead. In PIRA's view, the losses will offer more support to Asian prices than European prices because Asian markets rely more on these LNG supply sources than do European buyers. PIRA sees this pattern continuing in 2013.

*Ethane: Extracting a Toll

While total NGL production has reached record-high levels, ethane production growth faltered in 2012 as an oversupply-induced price collapse challenged extraction economics in some regions. The resulting ethane rejection into the gas stream bolstered gas supply in 2012, but ongoing weakness in both gas- and ethane-oriented drilling activity stands to mitigate the impact on 2013 gas supply.

NYC-based PIRA Energy Group reports weakness in the U.S. coal market persists. In Europe, EU Emissions Trading Scheme awaits a February 19 vote on the backloading amendment. Specifically, PIRA’s analysis of power, coal and environmental market fundamentals has revealed the following:

*Weakness in U.S. Coal Market Persists

As consumers struggle with high coal stocks and as producers face weaker exports, pressures to cut U.S. coal production levels have picked up. Lower-than-expected 4Q12 coal production numbers and a weaker net export outlook have lowered the supply outlook for 2013. However, milder-than-normal January and February weather and weaker gas price projections have cut the demand side as well.

*Labor Strike Spooks Coal Market Higher Week-on-Week

The coal market finished last week on an upward note, largely due to news that workers at Cerrejón’s mine in Colombia went on strike on Friday. With nearly all of Colombian coal exports captive to the Atlantic Basin, the pricing impact of the strike was focused on API#2 (Northwest Europe), with prices surging week-on-week for prompt pricing.

*Italian Power Prices Driven by PSV Spot Gas

Italian day-ahead power prices during February so far appear to be set by fairly efficient CCGT units pricing gas at spot gas PSV levels. However, while PSV prices are backwardated, the Italian power curve is in contango, with summer prices significantly higher than average February levels. PIRA believes that 3Q13 forward Italian power prices assume optimistic fossil fuel requirements ahead or the idea that PSV prices will re-couple with oil-linked contract gas levels.

*EU ETS Awaits February 19 Vote

PIRA expects that a narrow but successful passage of the backloading amendment (to support carbon prices) in the European Parliament’s Environmental Committee will lead to a jump in EUA prices. Considerable uncertainty will remain regarding the next vote in the full Parliament (without a voicing of German support). The vote on February 19 is absolutely necessary, but far from sufficient to ensure the implementation of this market support mechanism.

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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