PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending September 2nd, 2013

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LNG Storage Deficit Shrinks in August, while Risks of German Supply Losses Not Factored in Prices

PIRA Energy Group

PIRA Energy Group

PIRA Energy Group reports that the LNG Storage Deficit Shrinks in August. In the U.S., storage is on track to challenge last year’s record high, but plenty of capacity remains available.

NYC-based PIRA Energy Group reports that the LNG Storage Deficit Shrinks in August. In the U.S., storage is on track to challenge last year’s record high, but plenty of capacity remains available. In Europe, decisions by sellers to market more pipeline gas or by buyers to lift more pipeline gas will have a significant influence on European LNG demand in the months to come, which will have a knock on effect elsewhere in the world. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

*Storage Deficit Shrinks in August

Another month of intense storage injections in Germany has eased concern about prompt supply risk during the winter, but it has by no means alleviated it altogether. Among the various key countries, the split in strategy that we identified back in the second quarter – some countries building aggressive stocks, while others choose not to do so – remains a key feature through the end of August. Germany has been quite aggressive in its approach to erase its storage deficit, while France has willfully decided to keep buying lower.

*Europe’s Choices on LNG Buying

Decisions by sellers to market more pipeline gas or by buyers to lift more pipeline gas will have a significant influence on European LNG demand in the months to come, which will have a knock on effect elsewhere in the world. Over the past few months, Europe's call on LNG has essentially collapsed due to a combination of seasonal demand losses, underlying demand losses, and a preference for more pipeline gas. Decreases in LNG send out have occurred despite a sizable storage deficit.

*More Gas-to-Coal Exposure Ahead

The latest Henry Hub price slump has eased the bearish burden of faster year-on-year storage injections on gas balances. Lower prices have helped gas-fired electric generation retain a larger part of year-earlier gains captured from coal, and the resulting stronger gas demand has recalibrated the market more evenly between bulls and bears, for now. Fundamentals will reflect the interplay between several pivotal demand and supply tendencies. Relatively low CAPP (Central Appalachian) coal prices look poised to make this task more challenging for gas electric generation.

NYC-based PIRA Energy Group reports that risks of German supply losses are not factored in prices. In the U.S., off-peak markets were mixed, rising in the Northwest as hydro supplies dried up. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

*Risks of German Supply Losses Not Factored in Prices

The major uncertainty for price developments in the months ahead is whether German supply losses are temporary or more permanent. In principle, power generators statements show availability of nuclear and coal returning to normal levels, while coal newbuilds are being commissioned through the end of the year. The risk that an effective supply response is taking place to prevent further price collapses is not being factored into the forward curve. These risks make the front-end of the curve less bearish than previously expected.

*A Perfect Calm

With gas prices slipping, new capacity starting up, and little in the way of heat-induced price volatility to lean on, Western on-peak spot power prices fell across the board in August. Off-peak markets were mixed, rising in the Northwest as hydro supplies dried up. PIRA estimates that August Western Interconnect US loads will decline from the prior year. Through the first half of the month, loads appear to be down on a weather-adjusted basis. Generation fell with lower net imports from BC offset by higher net interchange from other sources.

*Upside in International Coal Prices Restricted Due to Lack of Supply Side Discipline, PIRA Retains Bearish 2013 Pricing Outlook

Upward pricing remains limited as long as the supply side continues not to exhibit any signs of self discipline. In the Atlantic, prices have hardly budged despite Colombian exports contracting by about one third due to the Drummond strike in addition to a surge in weather related demand. A protracted strike into the winter buying season would likely boost prices, however if/when the strike concludes, the returning supply (along with expanded tonnage from Colombia due to a port expansion) will pull prices lower.

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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