PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending December 14th, 2014

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Soft LNG Supply Status Bids Up Value of Tanker Capacity, while Turkey Adds Capacities to Meet Growing Electricity Demand Needs

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With oil prices dropping quickly, the ceiling on spot gas prices will be moving down as well; no more so than during upcoming injection season of 2015.

NYC-based PIRA Energy Group believes that soft LNG supply status bids up value of tanker capacity. In the U.S., EIA-reported storage draw could be termed positive, if not “shockingly bullish”. In Europe, with oil prices dropping quickly, the ceiling on spot gas prices will be moving down as well. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Soft LNG Supply Status Bids Up Value of Tanker Capacity

Downward pressure on tanker rates this year has been ameliorated somewhat in 4Q. An unprecedented need for floating storage, or at the very least slow steaming, has emerged. Supply growth is outpacing demand for LNG despite the market being less than two weeks away from the beginning of winter. Still, spot charter rates for a standard sized 145,000 cubic meter LNG carrier are down by 22% over last December. In particular, spot rates in the Atlantic Basin are trading at a premium to Asia due to the lack of an open arbitrage window to the Asia market.

Bearish December Balances

On the heels of the “shockingly bearish” update two weeks ago, last week’s EIA-reported storage draw could be termed positive, if not “shockingly bullish” given expectations centered in the mid-40s. To some degree, the hefty reduction is likely seen as a “correction” to the prior week’s shortfall, in addition to its unfavorable comparisons to a year ago (92 BCF) and the five-year average (72 BCF).

Summer 2015 NBP and the Real Impact of Lower Brent Prices

With oil prices dropping quickly, the ceiling on spot gas prices will be moving down as well; no more so than during upcoming injection season of 2015. While a legitimate argument could be made that spot prices in the U.K. and Germany can trade above oil-indexed levels for sustained periods during the winter, it is almost impossible to make this argument for spring and summer. The amount of spare production capacity possessed by Russia alone during this injection period almost instantly puts buyers in a position to nominate more contract (oil-indexed) gas if the spot price is trading at a premium to contract during injection season.

NYC-based PIRA Energy Group reports that Turkey adds capacities to meet growing electricity demand needs. In the U.S., given weaker gas prices and the likelihood of a hotter summer, 2015 should be a banner year for gas-fired generation. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Turkey Adds Capacities to Meet Growing Electricity Demand Needs

Turkey is now the only market in Europe to display electricity demand growth (3.4% year-on-year so far in 2014). The recently published official 5-year capacity outlook suggests more imminent commissioning of hydro capacities, together with coal and lignite units. While gas is still largely contributing to meet current fossil fuel needs (especially under the current dry hydro conditions), we will have to wait until 2016 or 2017 for more gas-fired capacity to come online. Gas pricing is also a major uncertainty going forward.

Eastern Grid/ERCOT Market Forecast

Given weaker gas prices and the likelihood of a hotter summer, 2015 should be a banner year for gas-fired generation. The increase in generation from 2014 is projected to be over 12 aGW, outpacing gains in gas-fired capacity, implying higher marginal heat rates in most markets. CY15 prices are weaker across the board reflecting the decline in gas prices. CY16 prices are expected to see slight gains with the exception of New England. Increases reflect a small rebound in gas prices, modest load increases and another round of coal retirements.

Weak Oil Markets Providing Additional Downside for Coal Pricing

A significant drop in oil prices weighed on the wider energy market last week, pulling Cal-15 API#2 (Northwest Europe) prices a tick lower. The impact on API#4 (South Africa) and FOB Newcastle (Australia) prices was somewhat muted due to falling dry bulk freight rates and an optimistic assessment that the coal market will become tighter soon by Glencore at its investor presentation on December 10. PIRA believes that fundamentals remain bloated and that a rebound in coal pricing is not in the cards in the short-term as the supply side seems buoyed by cost reductions.

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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