PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending November 9th, 2014

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A Depressed Oil Market Will Be Pushing Down Prices for Both Spot and Contract LNG, while Policy Risks Key Uncertainty in Our Pricing Outlook

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Natural gas engine delays and the abandonment of others, together with an increasing perception of further oil price declines, have pushed back the calendar for natural gas market penetration as a transportation fuel.

NYC-based PIRA Energy Group believes that a depressed oil market will be pushing down prices for both spot and contract LNG. In the U.S., last week's net build caused by far the largest single week reduction of the year-on-year deficit since the start of the injection season. In Europe, total Norwegian gas exports are running extremely high for this time of year. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

LNG Gas Price Scorecard

A depressed oil market will be pushing down prices for both spot and contract LNG. As oil prices fall, it will be important to note the price at which demand growth begins to rise, if it rises at all. The central question becomes whether or not it is a myth or reality that a pool of buyers exists that are price sensitive and have been lying dormant, or whether broader macroeconomic and contractual issues dictate more of the swing. For now, the Asian market is faced with relatively high stocks, and buyers continue to receive multiple offers for either spot volumes or topped-up contract levels.

Cold Weather Rules, for Now

Last week's EIA reported 91 BCF refill to Lower 48 storage left only one day remaining in the official 2014 injection season and brought working gas inventories to 3,571 BCF. Not long ago, such an end-October carryout seemed almost out of reach given the lowest end-March level in more than a decade. A full 8 BCF/D (56 BCF) higher year-on-year, last week's net build caused by far the largest single week reduction of the year-on-year deficit since the start of the injection season.

European Gas Price Scorecard

Total Norwegian gas exports are running extremely high for this time of year at over 320 mmcm/d. The 40-mmcm/d year-on-year increase is flowing almost exclusively into the German system. The gas demand increase is not coming from Germany, where temperatures are warmer than normal and PIRA's 10-day outlook for weather-sensitive use shows a 32-mmcm/d loss in gas demand over this period. Part of the reason for this Norwegian jump is tied to the new 25-mmcm/d flow of gas from Slovakia to Ukraine via the new Budince link, which is pulling more gas out of the German system toward the southeast flow through the Czech Republic.

NYC-based PIRA Energy Group reports that policy risks key uncertainty in our pricing outlook. Despite an uptick in Atlantic Basin prices, PIRA remains bearish on thermal coal. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Policy Risks Key Uncertainty in Our Pricing Outlook

Our latest European Electricity Monthly highlighted that there are plenty of moving policy risks embedded in the current forward curve. In addition to risks of major changes in the electricity market design in Germany, EUA prices have been trading higher, mostly on the back of policy developments. The final form and expected timing (if ever) of the proposed EU ETS Market Stability Reserve, together with the final decisions on the 2030 energy/climate package, are leading to the current price strength. That said, PIRA’s EU ETS coverage is generally bullish for medium- and longer-term EUA prices, although country-level initiatives can still undermine the EU-wide carbon market.

Despite an Uptick in Atlantic Basin Prices, PIRA Remains Bearish on Thermal Coal

Coal prices continued on a downward trajectory in the early stages of last week, with prompt API#2 (Northwest Europe) prices falling below $70/mt for the first time in several years. API#4 (South Africa) and FOB Newcastle (Australia) prices also moved lower early in the week. However, tanks on the Russia-Ukraine border pushed natural gas, oil, and coal price higher, likely on short covering heading into the weekend. As a result, API#2 and API#4 rebounded somewhat, while FOB Newcastle prices held relatively steady due to the limited influence that Russia-Ukraine relations have on Asian coal balances.

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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