PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending October 5th, 2014

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New Import Capacity in Japan and Korea Enhances Buying Flexibility, while Italian Power Prices Strengthen

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The spot market enters the fourth quarter at odds with itself; never has political risk had a greater bearing on European gas prices and never have supply/demand fundamentals been this weak, even if power sector use is looking up.

NYC-based PIRA Energy Group reports that new import capacity in Japan and Korea enhances buying flexibility. In the U.S., NYMEX falloff after hefty build highlights market’s lack of direction. In Europe, gas year begins with high stocks but even higher risks. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

New Import Capacity in Japan and Korea Enhances Buying Flexibility

Much attention is focused on China as the key growth market for Asian LNG both in the short and long term, but import capacity is quietly being added in the old growth markets of Japan and Korea as well, adding much needed flexibility and storage capacity for Asia’s two largest buyers, even if the demand growth outlook appears weak for now.

NYMEX Falloff After Hefty Build Highlights Market’s Lack of Direction

Last week's EIA update reported a hefty 112 BCF build, which handily bested consensus estimates in the mid-100s. Injections were the fastest since mid-June and the ninth triple-digit build this season. Only the 2001 injection season registered more 100+ BCF weekly refills (10), a feat that next week’s report should easily match.

Gas Year Begins with High Stocks but Even Higher Risks

The spot market enters the fourth quarter at odds with itself; never has political risk had a greater bearing on European gas prices and never have supply/demand fundamentals been this weak, even if power sector use is looking up. Buying into the notion of Russian supply risk has placed at least a 10p/th premium on day ahead and winter prices and probably more. Relieving the market of this angst will not be easy. Pricing history has shown that the absorption of weak fundamentals into spot prices can linger until late into the first quarter no matter how plump working gas storage will be ahead of winter. The entire situation sets off the alarm bells for the likelihood of enhanced price volatility in the winter ahead.

NYC-based PIRA Energy Group reports that Italian power prices strengthen. Coal prices continued to slide last week, but are nearing a bottom. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Italian Power Prices Strenghten

Italian day ahead prices are settling at maximum levels for recent months, translating into skyrocketing imports from France, which have hit an all-time high of 3.1 GWs, against an average so far during 2014 at about 2 GWs. While wind generation in Italy has been lackluster so far during week 40, a tighter gas market has also lifted the marginal costs for domestic gas-fired generation.

Coal Prices Continued to Slide Last Week, but are Nearing a Bottom

Coal prices rose for most of last week, but a broad selloff across the energy complex on Friday brought prices below the prior week’s close. Deferred prices particularly took a beating, flattening out the forward curve. In the short-term, coal stockpiles in most markets (except India) are elevated due to weak 3Q14 seasonal demand. With questions surrounding China’s import demand growth amid persistently high seaborne supply, the market has become more pessimistic about a recovery in pricing.

U.S. Coal Market Forecast

An inventory crisis was avoided this summer due to mostly milder weather and robust natural gas (NG) production, limiting the draw on coal stocks. SUB stocks have also been reinforced via coal and gas substitution. While rail service remains a concern for SUB coals, the MATS regulation, weaker exports, gas price risks, robust BIT output, and looming (2015) PRB capacity shut-ins suggest that greater downside price pressures are coming to the fore. Winter weather risks could result in coal demand and price upside risk.

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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