PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending December 7th, 2014

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China Stays Quiet on Spot Buying, while European Power Exposed to Changing Oil Prices through France

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Spot on-peak power prices were marginally higher at most western hubs in November compared with October. Price increases were modest despite a strong increase in gas, driven by colder than normal weather east of the Rockies.

NYC-based PIRA Energy Group believes that China stays quiet on spot buying. In the U.S., the storage change was shockingly bearish. In Europe, Turkey becomes central figure in Russian gas marketing. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

China Stays Quiet on Spot Buying

All eyes are on China as the last best hope for spot cargo support this winter, though seasonal factors could still emerge to drive up incremental sales in Japan and Korea in 1Q.

Lower Henry Hub Prices in 1H15

Last week’s indicated U.S. storage change in the EIA’s weekly report easily could be termed shockingly bearish. A massive week-on-week markdown in withdrawals was universally expected relative to both the prior report’s hefty pull and the cold weather inflated year-ago figure. Yet, the reported 22 BCF draw fell well below consensus centered in the mid-30s. Consequently, this Gas Flash makes short-term adjustments to PIRA’s Henry Hub Reference Case prices ahead of our normal Gas Forecast Monthly update to reflect higher 1Q domestic production and revised end-2014 storage levels that now equate to a disquieting year-on-year surplus of 170 BCF.

Turkey Becomes Central Figure in Russian Gas Marketing

Turkey is the only gas market growing in Europe (up by 8.8% in 2014) and will be important to Russian gas marketing on several levels in the future. Turkey will replace Bulgaria as the southern entry point for its marketing strategy in Europe and at the end of the day, it was a smart move that creates more flexibility for Russian gas marketers down the road. PIRA does not find the demise of the South Stream pipeline to be a particularly significant moment in the evolution of the European gas market because we never thought it would be built in the first place.

Western Grid Market Forecast

Spot on-peak power prices were marginally higher at most western hubs in November compared with October. Price increases were modest despite a strong increase in gas, driven by colder than normal weather east of the Rockies. Despite recent weakness, we remain bullish on Northwest heat rates for 2015. Continued weather-adjusted load growth, expected weak gas prices at Sumas, the potential negative impact of El Niño on hydro supply, and the refueling at the Columbia station in the spring are the principal factors. Implied heat rates are also expected to rise in the Southwest with the inland markets supported by weak gas prices, hotter spring and summer weather and coal retirements.

NYC-based PIRA Energy Group reports that European power exposed to changing oil prices through France. PIRA retains bearish outlook relative to forward coal prices. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

European Power Exposed to Changing Oil Prices through France

While Germany is, at the moment, largely decoupled from short-term changes in global oil prices, changing oil prices are nevertheless having an interesting impact on European prices via France, especially as LNG-driven Peg Sud prices have aligned to the other gas hubs, while France still holds the largest fuel oil burning capacities in Europe.

PIRA Retains Bearish Outlook Relative to Forward Coal Prices

Coal prices again moved lower last week, with weaker oil and gas prices pressuring the coal market lower. FOB Newcastle (Australia) prices declined by the largest extent, likely due to the high port and power plant stockpiles in China that continue to weigh on import demand there. Losses for API#2 (Northwest Europe) and API#4 (South Africa) were not far behind FOB Newcastle, although weaker dry bulk freight rates depressed API#2 relative to API#4 at the front of the curve. Coal fundamentals remain on the weak side, with a lack of upside for demand outside of weather-related risks, and limited rationalization on the supply side.

U.S. Coal Market Forecast

A cold November heightened concerns regarding sub-bituminous (SUB) coal inventories, drawing stocks below normal target levels. With rail service out of the PRB not expected to improve prior to 2H15 (at the earliest), generators are exposed to shortage risks (although the near-term December outlook is for milder conditions). Bituminous (BIT) coals reflect more bearish concerns with unit retirements, falling exports, new gas supply, and robust production offsetting all but the most extreme winter risks.

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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