PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending November 2nd, 2014

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LNG Import Terminals Pop Up to Offer Security - Not Better Prices, while Current German Power Prices Not Sustainable in the Longer-Term

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Prices declined at all hubs in October as loads faded seasonally and gas prices weakened.

NYC-based PIRA Energy Group believes that LNG import terminals pop up to offer security, not better prices. In the U.S., market focused on production and heating degree days. In Europe, Ukraine deal leaves markets with weather to hold up shaky fundamentals. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

LNG Import Terminals Pop Up to Offer Security, Not Better Prices

Previous conflicts of both a political and commercial nature are returning to prominence among the (soon to be) formerly Russian pipeline-dependent buyers of gas in Europe. Large scale and costly LNG import infrastructure projects are just now being realized after years of deliberations and planning, but their long-term sustainable use will remain in question given Russia's pricing power in these trades.

Market Focused on Production and Heating Degree Days

The 87 BCF injection revealed in last week’s EIA update almost nailed the consensus average. However, comparisons to last year’s 45 BCF build, and the five-year average of 59 BCF certainly underscored looser fundamentals — tied to both weather and robust U.S. gas supply. These dynamics will likely delay the start of the 2014-2015 withdrawal season by at least a few more weeks.

Ukraine Deal Leaves Markets with Weather to Hold Up Shaky Fundamentals

The supply/demand fundamentals for gas in Europe strongly suggest establishing a shorter position in the spot gas market. The forward curve has certainly expressed this view for some time for winter contracts, but the forward curve is a side show when compared to the trading liquidity in the prompt. With storage withdrawal season unofficially underway in November and an extremely warm October providing no gas demand support from weather, additional downward pressure on day ahead and one month forward prices will emerge.

NYC-based PIRA Energy Group believes that bearish fundamentals, but current German power prices not sustainable in the longer-term. Prices declined at all hubs in October as loads faded seasonally and gas prices weakened. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Bearish Fundamentals, but Current German Power Prices Not Sustainable in the Longer-Term

Fundamentals continue to point to a major mismatch between supply and demand in the medium term in Germany. So far, only a slowdown in solar additions is being documented and will possibly have a material impact on our summer 2015 balances, translating into less bearish prices during the summer. This fact does not change the broader bearish picture, with the needs for coal-fired units set to decline structurally in the years to come. Nevertheless, the market is trading at a status quo that is not sustainable from a longer-term perspective, but a lack of clarity on how the market design might change makes trading bets quite risky.

Western Grid Market Forecast

Prices declined at all hubs in October as loads faded seasonally and gas prices weakened. Ongoing transmission maintenance will continue to weigh on the Northwest market until local heating demand picks up. Southwestern markets appear likely to weaken in the near term with cooling loads dissipating and gas prices under pressure.

Seaborne Coal Markets Rocked by China’s New Coal Imports Tax

The news of China’s coal import tax, and the continued imbalance in its domestic market deflated Pacific Basin pricing last month, with physical FOB Newcastle pricing hitting fresh multi-year lows. While China’s coal production has started to ease, seaborne supply is still rising. Not surprisingly, Atlantic Basin prices have fared better than those in the Pacific Basin, with stronger dry bulk freight rates having pushed CIF ARA pricing up month-on-month. With Colombian supply on the rise, price gains for CIF ARA and FOB Richards Bay will be difficult in 2015, particularly with European coal demand expected to be down again year-on-year.

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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