Negotiators of long-term LNG contracts are in the midst of a massive recalculation of what a bearable price means for both buyers and sellers.
New York, NY (PRWEB) January 28, 2015
NYC-based PIRA Energy Group reports that LNG marketers face a drop in contract price perceptions. In the U.S., there was a reported withdrawal. In Europe, Russia faces key marketing opportunity as U.S. LNG exports loom. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:
Already a Hard Sell, LNG Marketers Face a Drop in Contract Price Perceptions
Negotiators of long-term LNG contracts are in the midst of a massive recalculation of what a bearable price means for both buyers and sellers. Sellers are facing lower oil-indexed prices, but a lack of clear consensus has emerged on how and when costs will come down to justify a lower price. Buyers are relieved that the market has come to their pricing point, but now they are faced with the potential that even their previous targets may have been too high.
Bearish Headwinds at Heating Season’s Halfway Mark
The reported 216 BCF withdrawal last week marked another 10 BCF “miss” versus consensus expectations that were again in the mid-to-high 220s. Unlike last week’s miss, which hinted at a market 10 BCF (1.2 BCF/D) tighter than expectations, today’s report suggested the opposite — 10 BCF looser — making both reports difficult to reconcile with one another.
2015 and 2016 Gas Balances are Poles Apart
A massive year-on-year end-March gas storage surplus and further supply gains will mandate record high gas-fired electricity generation (EG). April and May will provide a stress test of how low gas prices need to go to stimulate sufficient coal-to-gas switching to prevent excessive storage builds. For 2015, our U.S. gas balances highlight the tradeoff between rising production and required coal-to-gas substitution. In contrast, 2016 gas balances emphasize structural demand growth, stagnant supply and a prospective gas price recovery tied to the reversal of some coal-to-gas substitution.
U.S. Exports to Mexico to Accelerate in 2016 as Domestic Production Stagnates
January U.S. gas exports to Mexico have moved above the 1.9 BCF/D hurdle in place for 1Q14 as volumes on NET Mexico ramp up. Innocuous balances of late will be more striking in the months ahead as the call on U.S. supply accelerates as a result of stagnating domestic production. The past year’s demand increases should pale in comparison to the growth anticipated in 2015 and 2016 as new gas-fired electricity generation projects come online, enabled by ongoing additions to both cross-border and internal transportation infrastructure.
NYC-based PIRA Energy Group believes that coal-to-gas switching to re-emerge in the U.K. In the U.S., supply disruption news sparks price upturn. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:
EUA Volatile: Coal-to-Gas Switching to Re-emerge in the U.K.
Another week with significant volatility in the fuel pricing complex, and this time it's the turn of EUA prices, which have tumbled in response to a vote in the EU Parliament’s Industry Committee (ITRE) that failed to form an opinion on the MSR proposal. PIRA does not believe that this week's price drop should be entirely discounted, but at the same time, it is difficult to ignore the support that already exists for the plan to fix the EU ETS. The likely rebound in EUA prices, together with the weakness in gas prices, is set to bring coal-to-gas switching back in focus. The U.K. market, in particular, will see this dynamic in full display in the second and third quarters.
Supply Disruption News Sparks Price Upturn
The coal market rallied last week on news that the Fenoco railroad in Colombian had been ordered to halt coal shipments at night, potentially cutting Colombian coal exports by 15 MMmt/year. While this is subject to appeal, the risk of disruption was enough to drive 1Q15 API#2 (Northwest Europe) prices up week-on-week. In the Pacific Basin, news that Chinese producers may idle mines during the Lunar New Year offered potential for some supply discipline, pushing FOB Newcastle (Australia) prices up as well.
U.S. Coal Stockpile Estimates
While U.S. coal stocks drew more than typical in January, total stocks are now higher year-on-year. PIRA estimates U.S. electric power sector (EPS) coal inventories at 138 MMst as of the end of this month or 66 days of forward demand (versus 53 days one year ago).
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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