PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending August 25th, 2013

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Stronger Asian LNG Demand, but Not Necessarily for Spot Cargos, While German Day Ahead Prices Volatility Continues

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PIRA Energy Group believes that there will be stronger Asian LNG demand, but not necessarily for spot cargos. In the U.S., eastern stocks are expected to be refilled. Europe says “Yes” to Russian gas and “Yes” to profiting from LNG diversions.

NYC-based PIRA Energy Group believes that there will be stronger Asian LNG demand, but not necessarily for spot cargos. In the U.S., eastern stocks are expected to be refilled. Europe says “Yes” to Russian gas and “Yes” to profiting from LNG diversions. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

*Stronger Asian LNG Demand, but Not Necessarily for Spot Cargos

In view of slackening spot prices since April – even in the face of unexpected spot supply shortages and a recent heat wave – it is looking increasingly likely that a winter peaking country like Korea, where demand is in fact quite strong, could escape the cold months paying only a moderate premium to Europe to secure incremental volumes. Asian demand is peaking right now, but the added weather stimulus is coming too late in the season to produce a large-scale buying panic in the already tepid market.

*Eastern Stocks Expected to be Refilled

Canadian storage deficits have already been substantially reduced except in the east, but we anticipate that eastern stocks will not be entirely refilled since Marcellus gas has become a key source of the region’s supply mix. All in all, U.S. import deficits should narrow in the next two months, but domestic production growth is also forecast to lag last year’s strong sequential gains, keeping overall supply on a fairly even keel year-on-year.

*Europe says “Yes” to Russian Gas and “Yes” to Profiting from LNG Diversions

European LNG imports have dropped to a level last seen in 2003 due to a combination of improved prices for contract gas from pipeline sources and sizable arbitrage opportunities in diverting the LNG to markets in South America and Asia. The projected 70-mmcm/d year-on-year drop in LNG imports during August reflects weaker gas demand in Europe due primarily to the obliteration of gas use in power and is secondarily tied to weaker industrial sector demand.

NYC-based PIRA Energy Group reports that German day ahead prices volatility continues. In the U.S., coal stocks decline seasonally. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

*U.S. Coal Stocks Decline Seasonally

U.S. coal stocks continue to decline seasonally, despite varying weather impacts and sub-$4/MMBtu natural gas prices. NAPP (Northern Appalachian) and SPRB (Southern Powder River Basin) consuming regions tend to have lower relative inventory levels, while the Southeast, Northeast, and West Pacific regions remain well above normal target levels. PIRA expects that inventory builds will be more limited this fall as coal production cuts limit resupply levels.

*German Day Ahead Prices Volatility Continues

The announcements of plant closures did not have a noticeable impact on the back end of the forward curve, but output losses in the low-end of the stack (nuclear, lignite and coal) are underpinning German day ahead prices, with significant volatility displayed from day to day. Such volatility is also being underpinned by large fluctuations in availability of both solar and wind installations.

*Japan Poised to Go Nuclear Free in September

Japan will be nuclear free after Sept. 15, when Kansai takes offline its 2nd operating unit for maintenance. The first unit will go down Sept. 2. Kansai is the third largest consumer of LNG among the power utilities, so there will be some upside for LNG use this winter. In fact any real increases in EG-centered LNG buying will come mainly from Kansai, which will need to buy alternate fuels to meet power demand.

Rising Temperatures in Europe and Asia and Ongoing Labor Strikes in Colombia Are Not Enough to Alter Trade Balances

*Despite warm weather in key demand markets and a continued labor strike in Colombia fundamentally tightening coal supply/demand balances, prices were relatively unchanged last week. Prompt API#2 (Northwest Europe) and FOB Newcastle (Australia) coal prices moved slightly higher, but prices along the rest of the three major curves were flat to down. Coal pricing is already floating near (or below) marginal costs in some areas, and unless some major supply or demand events occur to significantly alter trade balances, prices will stay depressed.

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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