PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending February 23rd 2014

Record High Spot Price Quotes in Asia, while Renewable Surges in the U.K., but Gas Still Matters for Power Prices

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PIRA Energy Group

PIRA Energy Group

Forecasts of another cold spell ahead point to storage levels triggering intensive competition for spot gas during the March Bidweek auction.

New York, NY (PRWEB) February 26, 2014

NYC-based PIRA Energy Group reports record high spot price quotes in Asia. In the U.S., consuming East storage is becoming vulnerable. In Europe, changing supply dynamic is at the heart of future gas pricing in Europe. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Record High Spot Price Quotes in Asia

Record high spot price quotes in Asia are a reflection of a spot market where less volume is being sold at higher prices because more volume is ending up being sold under contract. Buyers exposed to the spot market are not pleased with this development, as the relatively thin amount of spot availability is not likely to disappear in 2014.

Changing Supply Dynamic Is At The Heart of Future Gas Pricing in Europe

Gas supply is down from Norway, the Netherlands, the U.K., and LNG sources. Meanwhile, Russian supply continues to grow. This changing supply dynamic is an important one to watch and is at the heart of future gas pricing in Europe. In part, the lack of Russian decreases is due to the reduced flexibility built into the restructured contracts for buyers. These buyers wanted a lower base for oil-indexed prices and received it, but in return they had to sacrifice some of their nominating flexibility. Now we are seeing the results of this trade and for spot markets, and it is applying downward pressure on day ahead prices.

Consuming East Storage Becoming Vulnerable

The bearish hue of this week’s double storage “miss” stands in stark contrast to the new prompt month highs achieved today. Though next week’s draw is expected to be less than half the Reference Week’s rate, the market’s bullish propensity appears underpinned by the issue of supply scarcity in the Consuming East. This region’s two-fold defense against scarcity of local inventories and access to high-deliverability salt storage in the Producing Region has become decidedly vulnerable.

Waiting for March Bidweek Fireworks

Forecasts of another cold spell ahead point to storage levels triggering intensive competition for spot gas during the March Bidweek auction. In particular, March weather could push Consuming East (CE) storage down to levels within striking distance of late 1Q03. In late February back then, Henry Hub (HH) prices nearly doubled as gas distributors sought to acquire enough spot gas to sustain deliveries to firm service customers in the advent of an extremely cold March.

Until Recently Supply Side Developments Have Dominated

With regard to US natural gas, until recently supply side developments have dominated the picture with the remarkable growth in Marcellus/Utica accelerating in 2013 and likely to grow even stronger in 2014. We continue to believe that the demand side of the shale revolution will eventually catch up with the supply side as US gas use in transportation, new industrial plants and LNG exports take off in the second half of this decade requiring increasing volumes of higher cost gas.

NYC-based PIRA Energy Group reports that renewable surges in the U.K., but gas still matters for power prices. In the U.S., gas and power markets have started off 2014 with extreme volatility. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Renewable Surges in the U.K., but Gas Still Matters for Power Prices

The U.K. has featured extremely high wind conditions so far during February, with wind output averaging steadily over 4 GWs, or about 10% of the total electricity demand. Among the key changes in the U.K. market, the increased role of biomass is worth noting, with the power generator Drax reporting encouraging figures for the operational performance of its recently converted biomass unit. Nevertheless, U.K. power prices are still largely anchored to NBP gas prices.

Gas and Power Markets Extremely Volatile

Gas and power markets have started off 2014 with extreme volatility, and that may remain a feature of the markets for months to come. Low gas inventories are a key driver but last year’s surge in coal retirements, active maintenance seasons and rising loads will also contribute. Gulf Coast gas prices are projected to increase by 19% year-over-year during March-December 2014 fueling power price increases in all markets and CCGT margin increases everywhere except the Midwest.

Weakness Prevails for Seaborne Coal Prices

Coal prices continued to push lower last week, with the bearish sentiment particularly impacting Atlantic Basin prices. Surprisingly weak Chinese PMI coupled with the approaching return of Drummond’s Colombian coal exports depressed the overall market. API#2 (Northwest Europe) prices for 2Q14 were down sharply, while the balance of the forward curve declined to a lesser extent. API#4 (South Africa) prices also slipped lower, however FOB Newcastle (Australia) losses were more measured.

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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