PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending March 2nd 2014

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A Tight Supply Market Could Squeeze Out Non-contracted Buyers in South America, While Large Renewable Generation Impacts the Utilization of the Coal-fired Capacity So Far During 2014

PIRA Energy Group

PIRA Energy Group

Irrespective of the Henry Hub weakness in play ahead of March, downstream markets across the northern tier remain on edge.

NYC-based PIRA Energy Group believes that a tight supply market could squeeze out non-contracted buyers in South America. In the U.S., bullish gas price risks remain, especially in Northern tier. Despite conflict, Ukraine intends to keep gas prices down. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Strong Demand from Key Buyers

Strong demand from key buyers like Japan and China in 2Q will compete with counter seasonal demand plays from April – a tight supply market could squeeze out non-contracted buyers in South America.

Bullish Gas Price Risks Remain, Especially in Northern Tier

Irrespective of the Henry Hub weakness in play ahead of March, downstream markets across the northern tier remain on edge. Gas scarcity fears are centered in the Midwest and eastern Canada as underscored by the gains posted this week in the financial basis swaps market. Frankly, if updated forecasts indicate that below-normal temperatures will carry deeper into March and elevate GWHDDs to rival last year’s levels, scarcity concerns will intensify with more comparisons to 1Q03. An expansion of scarcity risks may not only further inflate downstream prices above levels seen to date, but again have a knock-on effect, dragging Henry Hub and even prices in the West higher even if temperatures in that region remain mild.

Despite Conflict, Ukraine Intends to Keep Gas Prices Down

Ukraine's National Commission on Energy Regulation (NERC) intends to hold down the price of gas at a reduced level for industry until the end of June, even if the discount on natural gas imports in the second quarter will be canceled. Gazprom has not yet said whether or not the discount will be revoked in light of the recent political developments.

Gas Storage Refill Headwinds

Although widespread concerns surrounding the threat of gas scarcity in the waning days of the heating season have eased, considerable damage already has been done to U.S. and Canadian inventories. The now assured record high withdrawals in each country will leave an outsized footprint for injection season gas balances given the refills needed to reach what the market will likely deem minimum acceptable end-October levels. PIRA’s bullish gas prices for the 2014 injection season are rooted to foreseen storage refill headwinds relative to our end-October level.

NYC-based PIRA Energy Group reports that large renewable generation impacts the utilization of the coal-fired capacity so far during 2014. In the U.S., following four months of sub-par precipitation, February has come in well above normal. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Large Renewable Generation Impacts the Utilization of the Coal-Fired Capacity So Far During 2014

The major message that comes from the dispatching patterns so far this year is that coal and lignite are joining gas in no longer being immune to surges in renewable output. This development is unequivocally bearish for the dark spreads. Renewable capacity is now so large that a structural decline in the utilization of fossil fuel capacity is inescapable.

Following Four Months of Sub-Par Precipitation, February Has Come in Well Above Normal

Following four months of sub-par precipitation in the Columbia River basin to start the 2013-14 water year, February has come in well above normal (currently 164% above The Dalles). PIRA expects NWPP CY14 hydro production to fall by 4% from the prior year, representing an upward revision to last month’s forecast. Precipitation in the Northern Sierras also rose above normal in February, but the water year to date stands at only 40% of normal and snowpack remains at historically low levels. From the standpoint of western power prices, the gas market rebound is the major development of 2014. Higher gas prices along with rising solar capacity will result in lower on-peak implied heat rates.

Weakening Chinese Steel Sector a Grim Sign for Freight Outlook

Last month saw Cape freight rates flatten out with the Baltic’s four route Cape average bouncing around in a narrow window. Rates have been cushioned by the absence of cyclones battering N.W. Australia last month and Chinese iron ore buyers providing market support and pushing port stocks to record levels. However, PIRA believes the recent surge in Chinese iron ore imports could be a bubble waiting to burst, and we expect to see iron ore prices to start to slide.

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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New York, NY 10016

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