PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending September 7th, 2014

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LNG Supply Length Feeds Niche North American Demand, While in Spite of Stronger Nuclear Capacity French Prices Have Upsides

THE LEADER IN WORLDWIDE ENERGY MARKET ANALYSIS

Mexico and Puerto Rico have seen very strong LNG demand growth this year, but it does beg the question of whether the growth came as a result of stronger demand or simply that the LNG had nowhere else to go at a higher netback.

NYC-based PIRA Energy Group believes that LNG supply length feeds niche North American demand. In the U.S., stout injection above consensus, with triple-digit builds ahead. In Europe, Dutch role in Europe changes as production declines, imports rise. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

LNG Supply Length Feeds Niche North American Demand

Mexico and Puerto Rico have seen very strong LNG demand growth this year, but it does beg the question of whether the growth came as a result of stronger demand or simply that the LNG had nowhere else to go at a higher netback. The truth lies somewhere in between, as Mexican gas demand is capable of growing quickly, but only if the gas is priced at a bearable level. U.S. prices provide such a level, but the same cannot always be said for LNG imports, particularly when the parties involved have a better netback option elsewhere and a right to divert the cargo.

Stout Storage Injections Above Consensus

An outsized 79 BCF storage injection was reported in last week’s EIA update. The build handily bested the market consensus in the mid-70s and was also ~3 BCF/D above both the year-ago and five-year average. Stout injections continued in the Consuming East, but the Producing Region jumped to 10 BCF after last week’s 5 BCF seasonal low.

Dutch Natural Gas Role in Europe Changes as Production Declines and Imports Rise

It is hard to build a scenario where Dutch demand growth is strong enough to lift Europe as a whole, but it is worth considering the possibility of TTF being stronger than other benchmarks in the region. Dutch gas production is down by a sizable 43-mmcm/d year-on-year through August, and while much of this cut was logically associated with a warmer than normal first quarter, the truth is that year-on-year cuts in production have actually been even stronger since April. Additional cuts in peak gas output during for the upcoming winter cannot be assumed this year because production was reduced so sharply last year.

NYC-based PIRA Energy Group believes that In spite of stronger nuclear, French prices have upsides. Coal prices plummet on looming Chinese coal import ban implications. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

In Spite of Stronger Nuclear, French Prices Have Upsides

The availability of the French fossil fuel fleet is significantly lower year-on-year as a result of shorter- and longer-term downtime. While EDF has a strong incentive to dispatch significantly higher amounts of nuclear capacity this year, the French market remains inherently riskier than in prior years.

Coal Prices Plummet on Looming Chinese Coal Import Ban Implications

Coal prices weakened considerably last week, as the market was grappling with the implication of China’s ban of low-quality coal (high sulfur, high ash), which is seemingly a near certainty. Early indications are that this ban would have the largest impact on high-ash Australian coal, although details on the proposed regulation remain cloudy. As one would expect, Pacific Basin prices declined more than those of the Atlantic Basin with 4Q14 FOB Newcastle (Australia) prices suffering considerable losses.

U.S. Coal Market Forecast

One man’s ceiling is another man’s floor when it comes to current OTC coal prices. A mild summer (based on 10-year-average weather) and strong natural gas (NG) production have kept NG prices below the $4/MMBtu mark, limiting the draw on fuel stocks. Subbituminous stocks have also been reinforced via coal and gas substitution. While rail service remains a concern, the MATS regulation, weaker exports, gas price risks, and robust BIT output cast a bearish shadow over the coal space.

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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