PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending February 8th, 2015

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How to Store LNG Becomes a Central Issue to Price, while Demand Destruction and Renewables Bearish for U.K. Spark Spreads

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With only eight remaining EIA reports covering the heating season, the window of opportunity to make substantive progress in lessening the storage overhang from above-normal heating loads or weather-interrupted production is closing rapidly.

NYC-based PIRA Energy Group believes that how to store LNG becomes a central issue to price. In the U.S., looser balances prompt another price markdown. In Europe, fundamentals face off with Russia/Ukraine once again. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

How to Store LNG Becomes a Central Issue to Price

A long LNG market will place more and more of a focus on where storage capacity exists, who owns it, and how much capacity is spare. The U.S. will be a central battle ground for future storage valuation.

Looser Balances Prompt Another Price Markdown

With only eight remaining EIA reports covering the heating season, the window of opportunity to make substantive progress in lessening the storage overhang from above-normal heating loads or weather-interrupted production is closing rapidly. Forecasts for February weather are shaping up to be a letdown for any surge in weather-related demand. Given recent weekly balances, coupled with our latest near-term balances, last week’s report includes an update to our 2015 Reference Case prices.

European Fundamentals Faces Off with Russia/Ukraine Once Again

The entire energy complex said "enough" to the market's bearish tone over the past week. Do not be fooled. A bullish rally is not underway, certainly not one based on supply/demand fundamentals. A central point of focus in the upcoming week needs to be why cuts in Russian gas exports are no longer exclusive to the Ukrainian corridor. The broad-based logic is that Russia continues to cut gas supplies to the market because buyers are keeping nominations low ahead of injection season. The lower nominations are a combination of a desire by buyers/storage holders to withdraw more gas, growing availability of LNG and Norwegian supplies, and the clear outlook that shows the Russian gas that buyers are required to lift in the contract year will be substantially less expensive in the second and third quarter.

NYC-based PIRA Energy Group believes that demand destruction and renewables are bearish for U.K. spark spreads. In the U.S., gas and coal have downside price risks as the looming gas storage surplus takes center stage. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Demand Destruction and Renewables Bearish for U.K. Spark Spreads

In the U.K., lower NBP prices and potential closures of coal units have opened more opportunities for gas-fired dispatching. However, fundamentals in the meantime have been looking more bearish for the spark spreads as a result of large demand destruction in power and renewable additions. These dynamics need to be watched very closely and should make market players more cautious about future U.K. spark spreads and price developments.

U.S. Coal Market Forecast

Global energy prices appear to have reached a short-term floor with respect to global oil and coal prices. U.S. gas and coal have downside price risks as the looming gas storage surplus takes center stage. Weak oil is lowering costs. We expect significant gas-on-coal competition in 2015. With material structural demand shifts pending, the U.S. coal supply base is facing significant rightsizing (downsizing), with certain sub-regions facing sharper risks than others. Lower oil prices will help producers on the cost side.

Colombian Supply Disruption Fears Spark Coal Price Rally

Coal pricing rebounded markedly last week, with rumors that the Fenoco railroad would begin halting overnight movements this past weekend prompting a rally in API#2 (Northwest Europe) prices in particular. A notable uptick in oil prices also provided an updraft for coal price globally. A ban on night railings could curtail Colombian exports by 10-15 MMmt/year and, if implemented, would go a long way in realigning coal supply and demand to a more sustainable equilibrium.

Bangladeshi Gas Price Hike Rejected by Regulator

The technical evaluation committee of Bangladesh Energy Regulatory Commission (BERC) rejected a proposal submitted by the Titas Gas and Transmission and Distribution Company for hiking the natural gas tariff. The committee said the profits of the Titas Gas will reach Tk31.27 billion ($400 million), if the gas transmission charge is raised by the amount requested.

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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