PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending March 31, 2013

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European Colder-Than-Normal Weather to Support Higher Gas Spot Prices, while Additional Weakness in International Coal Pricing

PIRA Energy Group

PIRA Energy Group

Persistent colder-than-normal weather will support higher spot prices over the next 10 days. That is almost a given.

NYC-based PIRA Energy Group believes that European colder-than-normal weather will support higher gas spot prices. In the U.S., PIRA’s analysis points to a stronger risk of lower net gas injections. Important counter seasonal LNG market demand in South America, the Mideast, and Asia. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

*Colder-Than-Normal Weather to Support Higher Spot Prices

Persistent colder-than-normal weather will support higher spot prices over the next 10 days. That is almost a given. But as soon as PIRA's 10-day daily demand forecast shows a return to normal or even above normal temperatures, the question then becomes what is the justification for day-ahead prices at or above oil-indexed levels? What makes this year different and possibly a creator of a paradigm shift is that the supply situation continues to narrow in terms of accessible options.

*PIRA’s Analysis Points to Stronger Risk of Lower Net Injections

PIRA’s analysis points to a stronger risk of lower net injections, and thus, a higher probability of smaller reductions in the year-on-year storage shortfall in April. Even a high demand scenario — lower prices with less year-on-year gas-to-coal switching and higher Residential/Commercial demand from colder weather — would narrow the year-on-year storage deficit by only a nominal amount and would represent no more than ~10% of the forecast end-March deficit.

*Important Counter Seasonal Market Demand in South America, The Mideast, & Asia

The last cargos of 1Q13 have just about shipped, so it is time to look ahead to the demand profile of important counter seasonal markets in South America (Argentina, Chile, and Brazil), the Mideast (Kuwait and Dubai), and Asia, namely India and Taiwan. These regions are expected to see an increase in demand in 2Q13 versus 1Q13. To keep things in perspective, this increase contrasts with a drop in winter peaking for Asian demand in Japan and Korea alone.

NYC-based PIRA Energy Group reports that there was additional weakness in international coal pricing. In Europe, German electricity power exports surged. In the U.S., Western Interconnect electricity generation was down from the prior year. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

*Additional Weakness in Coal Pricing

Returning coal supply from Colombia has depressed seaborne coal prices this month, particularly in the Atlantic Basin. With CIF ARA (Northwest Europe) prices now at current levels, higher cost supply will be shut in from the U.S. and Russia, although it will take time for this to happen. In the Pacific Basin, lackluster buying activity has depressed FOB Newcastle (Australia) prices slightly, but discounted supply from South Africa and Colombian will likely weigh on Newcastle prices.

*German Power Exports Surge

Underlying demand trends are not showing signs of major deterioration, but demand remains extremely weak on a year ago basis, leading to the conclusion that the power markets will remain flushed with renewable generation. Widening overcapacities will push Germany further into the role of a major European power exporter, but grid constraints still limit Germany's ability to export the surplus supply in any given hour, preventing a solid recovery in German power prices.

*U.S. Western Interconnect Generation Down Year-on-Year

Generation within the U.S. Western Interconnect was down from the prior year. In addition to the small drop in demand, BC imports were lower. Nuclear generation fell due to the recently completed outage at Diablo Canyon 2. Hydro output tumbled over while non-hydro renewable generation increased. As a result, the call on thermal generation rose with coal accounting for most of the increase. Electricity demand across the Western Grid is estimated to be down modestly year-on-year for March.

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.

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