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

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Lower European Contract Gas Prices Will Not Stimulate Demand, But Will Offer Buyers an Opportunity Returning Coal Supply Dampens the Seaborne Market

PIRA Energy Group

PIRA Energy Group

Atlantic Basin Supply Outlook Weakens, But Spot Prices Contradict the Market’s Alarm.

NYC-based PIRA Energy Group believes that lower European contract gas prices will not stimulate demand, but will offer buyers an opportunity. In the U.S., gas storage came in well above the market’s expectation. The Atlantic Basin LNG supply outlook may be weaker, but Asian LNG spot prices contradict the market’s alarm. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Lower Contract Prices Will Not Stimulate Demand, But Will Offer Buyers an Opportunity

Lower contract prices will not drop enough to stimulate any type of demand recovery, but they will offer an opportunity for buyers to meet contractual obligations in full for the first time in many years, particularly if spot prices remain on par with oil-indexed levels. Herein lies the danger to buyers of the current market balance: the outlook for demand is indisputably atrocious once the weather is stripped out, but it is within the power of Europe's main suppliers to place a higher floor under spot prices by not only taking seasonal pipeline supply off the market, but also by actively engaging in diverting LNG cargos to other regions.

U.S. Gas Storage Comes in Well Above the Markets Expectation

The EIA delivered a whopper of a surprise in its weekly U.S. gas storage update. The storage withdrawal came in well above what the consensus had expected and handily topped even the “high ballers” within a relatively tight range of estimates. The bullish surprise effectively closed the books on February gas storage, revealing end-month stocks that were markedly lower than last year. Going forward, March stock draws are expected to be sharply higher year-on-year largely due to unusually mild year-ago temperatures, nearly doubling the storage deficit BCF by end-month.

Atlantic Basin Supply Outlook Weakens, But Spot Prices Contradict the Market’s Alarm

The supply outlook from the Atlantic Basin may be looking weaker, but Asia weighted average January spot prices belie the sense of alarm that has been repeatedly touted in the market. January spot prices, not including India, fell under contracted prices for the first time in 15 months, indicating that either supplies have not been quite so constrained or that key Asian buyers are getting better at negotiating good deals. Weakness in European LNG demand should not be underplayed as a key factor in adding to the Asian supply pool.

NYC-based PIRA Energy Group reports that returning coal supply has dampened the Seaborne market. In the U.S., coal markets remain under pressure due to healthy inventories. In Europe, volatile solar generation will affect German electricity peak prices. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Returning Coal Supply Dampens Market

The resolution of the coal supply issues in Colombia (labor strike and ship loading license suspension) added more downward momentum to the seaborne coal market. Not surprisingly, the impact of the returning supply was greatest on API#2 (Northwest Europe), pushing 2Q13 prices down week-on-week, while API#4 (South Africa) and FOB Newcastle (Australia) prices fell by less. Weak electricity demand data in India for February added a new downside risk to the Pacific Basin coal market.

U.S. Coal Markets Remain Under Pressure

U.S. coal markets remain under pressure due to healthy inventories, especially for higher-cost Appalachian products. PIRA notes that supply restraint will continue to serve as the leading edge of market correction. PIRA expects that sub-bituminous (Powder River Basin) markets will be among the first to rebalance.

Volatile Solar Generation Will Affect German Peak Prices

Solar PV capacity in the German market has climbed as of the end of January, having added additional MWs during January. With more capacity in the system, solar generation is set to become the first source of the German mix during a more frequent number of hours this year. However, while PIRA generally expects higher generation year-on-year, the day-to-day volatility in maximum available output is still very significant during 2Q and 3Q, affecting peak 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
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New York, NY 10016
(212) 542- 1677
info(at)pira(dot)com

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