PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending August 31st 2014

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Weather’s Role Expands in Asian Spot Price Formation, while French Prices to Be Underpinned by Higher Exports

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Spot LNG price mechanisms are just barely starting to click into a higher gear after bottoming out last month.

NYC-based PIRA Energy Group believes that weather’s role expands in Asian spot price formation. In the U.S., the build matches expectations, but the market focuses on coming heat. In Europe, it is difficult to look beyond Ukraine in European spot price outlook. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Weather’s Role Expands in Asian Spot Price Formation

Spot LNG price mechanisms are just barely starting to click into a higher gear after bottoming out last month. The biggest question in the months ahead will be whether global LNG market fundamentals have changed so significantly in the past year that the coming winter will not be the seasonal replay of last year’s extremely tight balances and record high spot prices. One key part of the answer -- the weather factor -- is unknowable at this point, but the broader point to understand is that weather itself will continue to play a growing role in spot price movements in Asia due mostly to China’s R/C-weighted growth in the years ahead.

Build Matches Expectations, but Market Focuses on Coming Heat

Last week’s EIA update lacked the surprise punch of the last few weeks as the reported 75 BCF injection was only a hair below the market consensus. The build did continue to trim the year-on-year deficit by 10 BCF, but at a much slower pace than last week and recent averages. After a very short-lived 5¢ uptick, the newly-minted October nearby NYMEX contract treaded water at ~$4.05 after the release, before oscillating around that mark near where it ultimately settled.

Difficult to Look Beyond Ukraine in European Spot Price Outlook

A European gas market where Ukraine is not the central focus of attention would be unprecedentedly bearish going into September. Supply/demand fundamentals are extraordinarily weak by almost every measure save a few pockets of growth in power tied to temporary nuclear issues. This world of commercial purity simply does not exist. Dark forces are spreading across the land and the ability to separate what goes on in the gas world from what goes on in the actual world is becoming harder to do. October marks the first month of the year when imports will be necessary to meet gas demand in Ukraine and that fact alone will raise the mark on the tension meter."

NYC-based PIRA Energy Group believes that French prices to be underpinned by higher exports. Cape rates surge in August, expected to track closely to paper rates through 2Q15. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

French Prices to Be Underpinned by Higher Exports

While Europe continues to face the threat of prolonged economic stagnation, which is undermining demand more permanently, significant supply losses have built up at the low-end of the stack in Northwest Europe, which are likely to lead to stronger fossil fuel requirements in the months to come. The French market has been able to meet the supply shortfalls so far in both the U.K. and Belgium through higher domestic nuclear and hydro generation. PIRA’s balances factor in a much stronger net exporting position for France in the upcoming months, or more than 2.5 GWs above 2013 on average, which would bring French net exports to a multi-year high. However, higher French exports imply a larger utilization of French domestic fossil fuel capacity in the months ahead, leading to firmer prices.

Cape Rates Surge in August, Expected to Track Closely to Paper Rates through 2Q15

The last few weeks of August saw a strong rally in Cape freight rates with the timing of the rally closely mirroring what happened in late August in both 2013 and 2011. The surge was supported by an active market composed of mining majors competing to boost exports and the lurking threat of a tug strike at Port Hedland. Given production indiscipline in China’s steel industry and expanding Cape-serviced exports in Australia and Brazil, we expect freight rates to exhibit the typical pattern of seasonal increases heading into Q4.

Thermal Coal Outlook Neutral Compared to Forward Pricing with Limited Upside

Strong dry bulk freight rates gave CIF ARA (Northwest Europe) pricing a lift from July to August, although FOB Richards Bay (South Africa) prices fell from July levels as South African prices needed to fall in order to compete. In the Pacific Basin, FOB Newcastle (Australia) prices increased slightly in August, despite the downturn in China’s thermal coal imports. While Indonesian exports are down over the year-to-date, Australian exports remain robust.

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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