PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending November 16th, 2014

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European Natural Gas Supply Cuts Emerge to Balance but Weather Risk Lingers, while European Electricity Markets German Dark Spread Has Upside

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While PIRA does believe that downward pressure on spot prices will eventually emerge, such a downward move in the weeks to come would mean that supply from several sources is overwhelming the market’s ability to consume it.

NYC-based PIRA Energy Group believes that while downward pressure on European natural gas spot prices will eventually emerge, such a downward move in the weeks to come would mean that supply from several sources is overwhelming the market’s ability to consume it. In North America, U.S. natural gas storage built week-on-week. In Asia, LNG storage issues moved up on the priority list as supply grows. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Supply Cuts Emerge to Balance, but Weather Risk Lingers

While PIRA does believe that downward pressure on spot prices will eventually emerge, such a downward move in the weeks to come would mean that supply from several sources is overwhelming the market’s ability to consume it. Indeed, we have seen little in the way of storage draws this month around the Continent, which implies that further cuts in domestic production (Dutch and U.K.) and imports will need to occur if a balance at current prices is to be struck.

U.S. Natural Gas Storage Builds W/W

The holiday-delayed EIA weekly U.S. storage report that revealed a 40 BCF build topped the consensus by a few BCF while more handedly besting both the year-ago and 5-year average builds. Those bearish comparisons fueled additional NYMEX selling that followed the bullish-to-bearish price reversal that had dominated last week’s trading prior to the storage update.

Storage Issue in Asia Moves Up Priority List as LNG Supply Grows

The quandary regarding the lack of a suitable Asian LNG/gas trading hub is a long standing one and as Asian buyers seek to decouple from oil linkage. It is taking on increasing importance- particularly for Asian and Mideast suppliers with no obvious gas benchmark. Furthermore, as a critical mass of LNG spot transactions migrate to Asia, not just during winter peaking periods but essentially as a year round form of supply, this missing “hub” is becoming increasingly awkward.

NYC-based PIRA Energy Group believes that in European electricity markets German dark spreads have an upside, with the overall fundamentals in the German market appearing structurally less bearish than a while ago. In the U.S., spot on-peak electricity prices were mixed in October with respect to September. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

German Dark Spread Has Upside

The updated medium-term forecasts by TSOs show a slight downgrade in renewable additions in the upcoming years, while 2014 will be the last year with a net fossil fuel capacity build in Germany. While the capacity outlook will be heavily influenced by policy initiatives in the upcoming years, overall fundamentals in the German market appear structurally less bearish than a while ago. At the same time, the fuel markets have entered into a more pronounced cyclical weakness.

Spot On-Peak October Prices Mix M/M

Spot on-peak prices were mixed in October with respect to September. Prices rose in PJM in response to maintenance outages at MISO’s MN hub due to a sharp drop in imports from Manitoba, and at MISO’s TX hub and in ERCOT due to above normal cooling loads. Most other markets drifted lower due to a combination of weaker gas prices and/or loads. If winter heating demand is normal, substantial volumes of gas that went into storage this year will have to find a home in the power sector next spring, boosting implied heat rates.

Australian Supply Rationalization Finally Appears

The coal market broadly finished last week higher than the prior week, with FOB Newcastle (Australia) prices rising by the largest amount. Glencore announced last week that it would be temporarily shutting down its Australian coal mining operations for three weeks in December in response to the weakness in pricing. This was the first major instance of a coal producer outside of the U.S. curtailing output in response to low pricing. While PIRA believes that this cut will keep prices from falling further, it will only be effective causing a sizeable rebound in pricing if more producers take similar action.

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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