PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending January 4th, 2015

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Big Decisions to Emerge and Change the Course of LNG Supply in 2015, While in Spite of Large Domestic Demand Destruction, Strong Exports Underpin German Prices.

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Terms such as "postponement", "cancellation", and "cost cutting" will feature prominently in the 2015 LNG market.

NYC-based PIRA Energy Group believes that big decisions will emerge and change the course of LNG supply in 2015. In the U.S., last week’s weekly storage update from the EIA revealed a further contraction in withdrawals. In Europe, the downward price move embraces persistently weak fundamentals. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Big Decisions to Emerge and Change Course of LNG Supply in 2015

Terms such as "postponement", "cancellation", and "cost cutting" will feature prominently in the 2015 LNG market. The ability of new LNG supply to move forward on the back of higher oil prices appears to be taking an extended holiday. The upstream and downstream implications will be wide ranging. On the upstream side, PIRA sees a world where announced LNG projects will begin to make official statements that moving ahead will no longer be economical. Of course, in our view the writing has been on the wall for some time.

Damage Control Difficult

Last week’s weekly storage update from the EIA revealed a further contraction in withdrawals — on top of last week’s below-expectation pull. The 26 BCF draw, however, again widely missed the consensus expectations centered in the mid-30 BCF area, notwithstanding some polls pointing to a W/W decline a bit north of 40 BCF.

Downward Price Move Embraces Persistently Weak Fundamentals

The lack of persistent colder-than-normal weather is finally paving the way for lower day-ahead and forward prices. The weak supply/demand gas fundamentals we have been discussing for some time are playing an increasingly central role in price formation. A cold winter forecast by several weather forecast suppliers still makes us somewhat nervous about the longstanding downward trajectory of our day-ahead forecast, but the behavior of the forward curve over the past 30 days has been solidly trending towards PIRA's view. Forward curve prices have already hit PIRA targets to the downside for the first quarter and are moving into close range for the second and third quarters.

NYC-based PIRA Energy Group reports that in spite of large domestic demand destruction, strong exports underpin German prices. In the U.S., mild weather, lower gas prices and stronger hydro output drove western energy prices down in December. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

In Spite of Large Domestic Demand Destruction, Strong Exports Underpin German Prices

Freshly released demand data for the German market confirms our fear that large demand destruction is taking place, with a significant weakness reported for energy-intensive industries. At the same time, recent policy initiatives are specifically targeting the energy efficiency of buildings. In this context of weaker demand, German net exports are holding up well, keeping German pricing broadly anchored to the marginal cost of coal—at least under normal wind conditions. The adoption of the "Action Programme on Climate Protection 2020" poses key bullish risks for the back of the curve, but it is not at all clear how and when the power sector will cut the additional 22 MT of C02 required by the plan.

Western Grid Market Forecast: December 2014 and Medium-Term Outlook

Mild weather, lower gas prices and stronger hydro output drove western energy prices down in December. Declines from November ranged from ~$4/MWh at Mid-Columbia to $9/MWh at NP15. Off-peak markets saw drops of similar magnitude. Power price forecasts have been marked down along with gas prices while implied heat rate projections have increased for 1H15. Small price increases are expected for California hubs in 2016 due to higher gas and CCA prices and capacity retirements.

Lower Oil Prices Preventing Upside for Coal

December was a fitting end to 2014 for coal pricing, which is to say that prices continued to move lower. Our string of consistently bearish outlooks (including this month) now stands at 39. Along with lower oil prices reducing production and shipping costs, concerns over Chinese import demand going forward, continued supply growth in Australia and Colombia, and limited upside for demand elsewhere will prevent a substantive rebound in thermal coal pricing in the short term. We retain a bearish outlook for both Pacific and Atlantic Basin pricing.

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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