PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending June 22nd 2014

Softer Demand for Spot LNG Will Persist While Supply Options Broaden, while Rigidities Limit U.K. Coal to Gas Switching

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A key focus point in the weeks ahead is coal/gas switching, which has seen some life breathed into it by lower NBP prices.

New York, NY (PRWEB) June 25, 2014

NYC-based PIRA Energy Group believes that softer demand for spot LNG will persist while supply options broaden. In the U.S., another stout storage build weighs on gas futures. In Europe, limits persist on ability of gas to grab back demand in U.K. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Softer Demand for Spot LNG Will Persist While Supply Options Broaden

A weak global LNG spot market will not be dissipating any time soon. While PIRA sees global LNG supply down slightly year-on-year through June, significantly weaker demand is the primary culprit for spot price weakness. Chief among the weaker demand points is the European gas market, which is doing everything within reason to divert volumes away from a spot market that has dropped to a three-year low. PIRA does not see this situation turning around any time soon and even the winter market will be vulnerable to weak spot prices that will trade at a discount to weighted average Japanese and broader Asian contract prices. It is getting to the point where production cuts by LNG suppliers will have to be considered.

Another Stout Storage Build Weighs on Gas Futures

Today’s storage report indicated U.S. inventories increased by 113 BCF, marking the sixth consecutive week of triple-digit builds. More important, however, was the fact that the week-on-week increase topped the consensus forecast centered on ~110 BCF. An ensuing NYMEX selloff seemed assured, yet after an initial drop, enough buying materialized to lift the July contract above where it had traded ahead of the release. Eventually, however, the contract took almost an 8¢ day-on-day hit, settling at ~$4.58/MMBtu.

Limits Persist on Ability of Gas to Grab Back Demand in U.K.

A key focus point in the weeks ahead is coal/gas switching, which has seen some life breathed into it by lower NBP prices. U.K. gas-fired dispatching has been somewhat more supported, having averaged roughly 11.8 GWs and 47.7 mmcm/d of gas offtake in the NTS, but gas-fired generation is far from its ancient glory. With a strong recovery in residual power demand unlikely for the third quarter, we are wondering how much more coal-fired capacity can be switched off, creating room for gas-fired output.

NYC-based PIRA Energy Group reports that rigidities limit U.K. coal to gas switching. In the U.S., with 2Q14 nearly complete, there are clear winners and losers among the regional markets in terms of margins. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Rigidities Limit U.K. Coal to Gas Switching

Our London Seminar has painted a gloomy fundamental picture for the short term, with a chronic lack of fossil fuel needs in the power sector now also visibly impacting the fuel pricing complex as well. A detailed analysis of U.K. plant operational patterns shows that, while gas-fired generation has inched higher, further dispatching opportunities for gas-fired units appear quite limited at this stage, as the residual coal-fired dispatching is more difficult to displace.

Eastern Grid/ERCOT Market Forecast

With 2Q14 nearly complete, there are clear winners and losers among the regional markets in terms of margins. The biggest winners are NY-A with average on-peak CCGT spark spreads up 45% from a year ago to $20/MWh and PJM-W, with a 38% increase to $26.50. While not the worst performer this quarter, ERCOT may qualify as the biggest disappointment. Despite changes to real-time pricing designed to improve net revenues to generators, margins are unchanged from the prior year at $13.50/MWh. And a flood of new gas-fired and wind capacity is set to hit the market during the second half of the year.

Thermal Coal Prices Continue to Slide, Near-Term Outlook Largely Bearish

Coal prices moved broadly lower this week, with FOB Newcastle (Australia) prices leading the downward charge. A lack of Chinese buying activity and a lack of supply discipline from the exporting side continue to depress pricing. Cal-15 and Cal-16 prices absorbed significant losses as the market is starting to believe that the oversupply within the market will not clear up anytime soon.

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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