PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending September 8th, 2013

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China Increases LNG Import Capacity but Volume Lags, while CHP Units in Key European Markets Operating in Spite of High Gas Prices

NYC-based PIRA Energy Group reports increases LNG import capacity but volume lags. In the U.S., while output has held relatively steady thus far in 3Q13, gas drilling has managed to stage a modest rally since bottoming out in May and June. In Europe, major shifts in Russian gas flows over the past few weeks portend a future when additional adjustments will be made on a more significant scale. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

*China Increases LNG Import Capacity but Volume Lags

China's overall LNG import growth has been lackluster this year compared with its growth import infrastructure, and demand for AB cargos in particular has been exceedingly weak. As the country readies itself to commission another two to three terminals by the end of this year, it’s not clear that the new capacity will translate into a measurable increase in imports beyond initial commissioning cargos. This reluctance to commit to higher import volumes is a primary reason why spot prices in Asia appear to be stuck at current levels despite the upcoming winter buying season.

*Dry Gas Drilling Rebound

While U.S. output has held relatively steady thus far in 3Q13, gas drilling has managed to stage a modest rally since bottoming out in May and June. Unsurprisingly, increased drilling activity in the Marcellus/Utica plays has been the prime driver behind this rebound, but rig count gains elsewhere appear to go counter to the conventional wisdom of late. Growth has been weighted to dry gas regions versus wetter areas, in addition to higher vertical/directional rigs as opposed to the horizontal rigs predominantly utilized in unconventional plays.

*Russia Connects Europe and Asia

Major shifts in Russian gas flows over the past few weeks portend a future when additional adjustments will be made on a more significant scale. None of these recent shifts will have a demonstrative influence on spot or contract prices in the near term, but they offer a glimpse at a market in the second half of the decade when Russia will not only be connected more directly with Western Europe, but also with the Asia market.

NYC-based PIRA Energy Group reports that CHP units in key European markets operating in spite of high gas prices. In the U.S., PIRA adopts bearish view on coal market. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

*CHP Units in Key European Markets Operating in Spite of High Gas Prices

While gas units are not profitable at current wholesale prices, there are pockets of gas-fired generation (CHP units) still in operation to produce process steam or meet electricity needs of industrial and municipalities. Several CHP units are also coming online in Germany this year and are set to lower the call on centralized fossil-fuel units. In addition, other non-renewable decentralized generation is also set to stay strong, also in light of continuous orders of “reciprocating engines” all across Western Europe.

*PIRA Adopts Bearish View on Coal Market

With increasing evidence that Central Appalachian coal production is not falling fast enough, PIRA has adopted a more bearish view of this coal market. In addition, we retain a bearish view toward the Northern Appalachian/Pittsburgh 8 seam market due to increased competition from low cost Marcellus gas supply. We hold a neutral bias toward the Illinois Basin given a fairly flat level of forward contango and increased customer switching to this basin. Our view on Southern PRB coal is a bit more nuanced.

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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