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PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending June 1st 2014

China Shakes Up Its Buying; Finding Patterns Proves Elusive, while Structural Weakness in Demand Will Continue to Undermine Power Prices

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Persistent weakness in European electricity demand is symptomatic of structural factors that go well beyond the unfavorable weather that emerged earlier this year.

New York, NY (PRWEB) June 04, 2014

NYC-based PIRA Energy Group reports that China shakes up its buying; finding patterns proves elusive. In the U.S., another triple-digit injection stymies futures gains. In Europe, storage issues weaken outlook for third quarter. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

China Shakes Up Its Buying; Finding Patterns Proves Elusive

Part of the general aversion to incremental spot buying among China's northern-based facilities outside of the winter demand peak has been the sheer volume of non-contracted incremental volumes from Qatar, the major contract supplier that had recently supplanted pure spot volumes from other suppliers. While other spot volumes played some part in compensating for lower Qatari volumes, the fact remains that those high-priced Qatari volumes were shifted toward much lower-priced European markets last month, which is why plant maintenance in Qatar cannot entirely explain the fall in Chinese sales. The other factor in the weak April showing is the structured, disciplined nature of Chinese buying, which still exists even with 10 import facilities and two dedicated state buyers now in play. A third state buyer, Sinopec, will commission its Qingdao terminal later in the year.

Another Triple-Digit Injection Stymies Futures Gains

A stout 114 BCF was injected into storage during the Reference Week, according to last week's EIA update. Although ~26 BCF larger than the year-ago injection, the build was only slightly above expectations near 110 BCF. In its newly minted role as the nearby contract, July futures initially dipped ~10¢ to the low $4.50s before rebounding above pre-release levels. It settled at $4.56, down day-on-day by 6¢.

Storage Issues Weaken Outlook for Third Quarter

Storage levels are now entering an area where third quarter buying will have to be reduced. Buyers have been bargain hunting up until now, but they are reaching a point where placement of the gas is becoming an issue. PIRA is building in lower storage injections in 3Q and lower seasonal gas demand is a certainty. The only thing preventing lower prices from emerging will be a reduction in gas supply to the market by key producers. Where these cuts come from is not entirely clear given current output plans. Counting on additional cuts in LNG imports to balance the market in the third quarter may not be a wise assumption. Demand may be picking up a bit, but the volumes will not be anywhere near significant enough to support spot prices in a meaningful way.

Romanian Industry get Natural Gas Price Relief

Natural gas prices for Romanian companies will not increase. Moreover, Minister Delegate for Energy Razvan Nicolescu suggested that the prices might go down in the upcoming months by adopting the package proposed for public debate. For non-household natural gas consumers, the deregulation will end on October 1, 2014, and for the household consumers, it will end on October 1, 2018.

NYC-based PIRA Energy Group believes that structural weakness in demand will continue to undermine power prices. In the U.S., normal weather fundamentals argue for a bearish view of summer on-peak implied heat rates. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Structural Weakness in Demand Will Continue to Undermine Power Prices

Persistent weakness in European electricity demand is symptomatic of structural factors that go well beyond the unfavorable weather that emerged earlier this year. This weakness represents a major concern for price developments, especially since renewable generation continues to grow. In France, weather conditions have been hiding an even more worrisome structural demise of electricity demand growth. Additional ambitious renewable targets have also been outlined on a regional basis through the Regional Frameworks for Climate, Air and Energy (SRCAE).

Bearish View of Summer On-Peak Implied Heat Rates

Normal weather fundamentals argue for a bearish view of summer (June-September) on-peak implied heat rates. Key factors include good hydro conditions and improved coal unit availability (from July forward) in the Northwest, rising solar generation in the Southwest, and weak weather-adjusted loads. Higher gas prices are also bearish for heat rates, though not necessarily for CCGT spark spreads.

Sluggish Demand and Ample Supply Plaguing Seaborne Coal Prices

Atlantic Basin prices moved slightly lower last month, as coal demand sags seasonally, and coal supply remains robust. Some European buyers have been looking to defer deliveries, suggesting robust stockpiles. FOB Newcastle (Australia) prices were fairly steady this month, but the year-on-year decline in Chinese thermal coal imports and seasonal ending in Indian buying are bad signs for those who are hoping for a quick rebound in pricing.

Cape Rates Strengthen Despite Flooded Ore Market

This last month saw Cape and Supramax rates generally weaken, while Panamax rates have turned up as Atlantic rates recovered from disastrous levels in April. The Cape market has experienced high fixture volumes and iron ore exports from Australia have been at record levels. We remain unconvinced that China’s steel industry can continue to expand output as losses mount in the sector and steel prices remain weak.

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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