While a surge in new LNG supply starting in 2015 will be hard to miss, incremental supply availability up until that point will continue to rest on the shoulders of European buyers' rejected contracted volumes.
New York, NY (PRWEB) July 09, 2014
NYC-based PIRA Energy Group believes that European import flexibility remains central to global LNG supply. In the U.S., the injection was below expectations, but still above normal. In Europe, current length implies lower spot prices ahead. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:
European Import Flexibility Remains Central to Global LNG Supply
While a surge in new LNG supply starting in 2015 will be hard to miss, incremental supply availability up until that point will continue to rest on the shoulders of European buyers' rejected contracted volumes. Two key markets are worth watching for the upcoming winter: while not a major re-exporter, the U.K. market is important because it appears to have the most amount of seasonal swing in LNG buying; the Spanish market is the other key market to watch.
Injection Below Expectations, but Still Above Normal
The storage injection reported by the EIA fell a hair below market expectations, breaking the string of outsized increases. Yet, the injection chipped ~24 BCF off the year-on-year storage deficit — the largest weekly decrease in more than a month — and also exceeded the five-year average of 68 BCF by the highest margin this injection season.
Current Length Implies Lower Spot Prices Ahead
The next 60 days offers the lowest gas demand period of the year. This year will be particularly low due to the further erosion of power sector gas demand in most countries other than the U.K. Normally during this period, storage injections would pick up to handle the gas not being consumed. This year spare storage capacity is extremely limited outside of France, as the European gas market enters the third quarter with record high storage levels. PIRA has cut the injection forecast in the third quarter to a mere 203 MMCM/D, which is more than 100 MMCM/D lower than last year.
NYC-based PIRA Energy Group believes that higher net exports underpin German prices. In the U.S., heat rates are projected to decline year-on-year at all hubs during the second half of 2014. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:
Higher Net Exports Underpin German Prices
German day-ahead prices have been benefitting from somewhat stronger net exports, with exported volumes hitting new historical highs in June and so far in July. In spite of shrinking volumes sold to France and the Nordic markets, larger year-on-year swings have occurred with the Southern and Eastern interconnectors (Austria and Czech Republic). Cross-border flows and interconnectors have become a specific area of attention for policy makers, with the E.U. leaders set to establish specific interconnection objectives.
Western Grid Market Forecast
Heat rates are projected to decline year-on-year at all hubs during the second half of 2014. Mid-Columbia should see the largest drop, averaging 14.7% below the prior year. We look for heat rates to be down in the 8-9% range at the California hubs and at Palo Verde. With El Nino conditions likely to prevail by the coming winter, first half 2015 should see a rebound in California hydro generation and weaker results for the Northwest. Gas prices are expected to turn lower post winter, which is bullish for heat rates. Finally, although easing from this year’s pace, solar capacity additions should remain strong. We look for Mid-Columbia heat rates to strengthen with modest declines continuing at the Southwest hubs, led by a 5% drop in NP15.
International Thermal Coal Forward Prices Drop Again
Coal prices moved lower again this week, with FOB Newcastle (Australia) prices exhibiting the most amount of weakness as the entire forward curve lost significant ground from last week. Some of the weakness in FOB Newcastle prices was due to continued lower offer prices for Chinese domestic coal, but also as Australian domestic coal-fired generation hit a nine-year low. Despite somewhat sluggish demand growth, coal supply remains persistently robust, although BHP Billiton announced significant job cuts at its Mt Arthur thermal coal mine this week.
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.
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