Europe's position in the LNG market in the upcoming months is fast becoming defined as either a storage center or an outright dumping ground.
New York, NY (PRWEB) November 26, 2014
NYC-based PIRA Energy Group believes that the long LNG market turns to Europe for answers. In the U.S., there was a larger than expected storage draw; rally fizzles. In Europe, rising prices ignore lack of fundamental underpinning in favor of headlines. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:
Long LNG Market Turns to Europe for Answers
Europe's position in the LNG market in the upcoming months is fast becoming defined as either a storage center or an outright dumping ground. While prices in Asia have descended rapidly due to either losses in crude oil values or spot LNG quotes, the stickiness of NBP at current levels has made Europe a much more enticing netback for Atlantic Basin LNG suppliers. The key question will be whether high LNG imports by Europe will translate into higher LNG send out or will the import terminals just be used as a temporary home for storage before even larger reloads emerge in the first quarter?
Larger than Expected Storage Draw; Rally Fizzles
Last week’s EIA update on U.S. storage activity revealed that net draws have indeed begun. Most had expected a draw, but the reported decline easily bested the consensus estimate near 10 BCF. The wide “miss” prompted an initial ~10¢ rally in the nearby contract pushing December to ~$4.50 before selling pressures resulted in a steep ~25¢ pullback. But those losses ultimately uncovered enough buyers to lift the December contract back to its earlier high and also within striking distance of the November 10th high.
Rising Prices Ignore Lack of Fundamental Underpinning in Favor of Headlines
Focus on Norwegian production problems seems to be paramount in justifying current gas prices at slightly higher levels. As PIRA has documented over and over again, the supply/demand fundamentals of the European gas market do not support prices at this level, even after factoring in the Norwegian glitch. Even after factoring in the temporary loss of this production capacity – 23-mmcm/d of potential output between Troll and Skarv – Norway is still exporting gas at all time highs for November. Perhaps what the market is saying, by raising day ahead another 3p/th over the past week, is that all time highs for Norwegian exports at this time of year are simply not enough despite record high storage levels and no sign of demand growth before or after adjusting for weather.
NYC-based PIRA Energy Group reports that French power prices tumble in November. In the U.S., spot on-peak prices were mixed in October with respect to September. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:
French Power Prices Tumble in November
French day-ahead prices have tumbled during November, settling well below expectations and dragging the forward curve down with them. While weather conditions have once again been very mild, the pricing picture suggests bloated balances especially at off-peak hours, with several hours still settling around the cost of nuclear and below. Another factor that the power curve may start mirroring soon is the growing length of the LNG market, which may start to impact the French power market, as gas plants are in a price setting position at on-peak hours.
Eastern Grid/ERCOT Market Forecast
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. This will be especially evident in the Mid-Atlantic region as local gas supply growth continues to outstrip outbound transmission capacity.
Atlantic Basin Prices Rally Despite Ample Supply
Coal prices, particularly API#2 (Northwest Europe) and API#4 (South Africa) prices, moved higher again last week, carrying forward the price gains of the prior week. As a result of the price gains, the front of the API#2 forward curve is now in backwardation, which is odd considering the market has been awash with supply for some time now, and coal stockpiles are ample. The rise in prompt European gas pricing is likely behind some of the strength, although it would not be surprising if some suppliers were holding back prompt tonnage to create the perception of tighter market conditions.
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.
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