Current month U.S. gas exports to Mexico have moved decidedly above any previous winter’s highs as volumes on NET Mexico ramp up.
New York, NY (PRWEB) February 18, 2015
NYC-based PIRA Energy Group believes that Europe’s role as incremental supplier of LNG to the global gas market by reloading or diverting cargos to Asia, South America, and even the Mideast is about to change. In the U.S., last week’s withdrawal came in below consensus estimates. In Europe, production losses in the first half of the year versus normal will be larger than the second half of the year. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:
Global LNG Fundamentals Scorecard
Europe has spent the better part of the last two years as an incremental supplier of LNG to the global gas market by reloading or diverting cargos to Asia, South America, and even the Mideast. This role is about to change, if only temporarily.
Colder Near-term but Bearish Fundamentals Still Ahead
Last week’s withdrawal came in below consensus estimates. The reported change once again confirmed bearish fundamentals with weather-adjusted balances over the past four weeks showing a ~4 BCF/D looser year-on-year market. This bearish reality appeared to sap the life out of the day prior's weather-induced rally, with the prompt contract falling to the low $2.70s in the minutes after the report’s release and settling at $2.71/MMBtu.
European Gas Price Scorecard
Picking up on Monday's note on the significance of Dutch gas production, let's focus on seasonal production in the months to come to show what the hyperbole is and what is grounded in reality. The bottom line is that the production losses in the first half of the year versus normal will be larger than the second half of the year. The prompt surge to 55p/th (€25/MWh) in a market where temperatures are above normal seems to be more of a short squeeze than a sustained fundamental threat, but the fact is that the market will be losing around 115-mmcm/d of gas production through June 30 compared to what was originally planned.
Why Does Groningen Matter?
The Dutch government's decision to restrict Groningen output comes amid concerns about increased seismic activity in the region. From a broader commercial perspective, this limit placed on production is of minimal significance on a sustained basis for European spot prices. The volume lost to the market is not necessarily needed in a current warmer-than-normal weather environment, where storage operators are already trying to unload gas to refill at lower prices during the upcoming injection season. However, it is not a coincidence that the government decided to make this announcement during what is typically the coldest week of the year in Europe.
Eastern Canadian LNG Projects Still Facing Stiff Headwinds
While new eastern Canadian LNG projects continue to be announced, PIRA Reference Case outlook of lower oil prices and insufficient cost-effective supply for the region remain likely to delay indefinitely all proposed eastern Canadian LNG export terminals.
Net Flows Ramp Up
Current month U.S. gas exports to Mexico have moved decidedly above any previous winter’s highs as volumes on NET Mexico ramp up. In addition, recently announced budget cuts and the related realignment of spending plans due to lower oil prices imply decidedly greater downside risks to domestic gas production than before. This, in turn, suggests an even faster acceleration of the country’s reliance on U.S. exports – beyond the near term.
Thermal Coal Rallies on Rising Oil and Gas, Fenoco Nighttime Rail Ban
Coal pricing continued to rally last week, with the fronts of the forward curves rising more than the backs, steepening the backwardation in the market. Much of the upward momentum in pricing occurred due to the announcement of the beginning of the nighttime rail ban in Colombia, although stronger oil and gas prices also played a role. The potential loss of a significant portion of Colombian export supply looms large on balances and prices although PIRA does not believe the market will be caught short, particularly in light of a nearly 19 MMmt y/y reduction in Chinese total coal imports in January.
NYC-based PIRA Energy Group believes that the French market pushed higher by gas and plant unavailability. In the U.S., spot prices were mixed in January compared to December as Northeast prices rose, abetted by colder weather and higher gas prices, while Midwest and South Central markets weakened as temperatures averaged above normal in the Plains states, and gas prices fell. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:
French Market Pushed Higher by Gas and Plant Unavailability
The week once again featured significant volatility in the fuel pricing complex. The front of the gas curve has found support in the Dutch government's decision to restrict Groningen output, amid concerns about increased seismic activity in the region, leading to firmer power prices across North Western Europe, including France. In addition, plant unavailabilities have also contributed to firm French prices, but gas prices are the major driver and, as long as TTF or PEG NORD gas prices stay at the current levels, French baseload contract for March will remain fairly supported.
Eastern Grid/ERCOT Market Forecast
Spot prices were mixed in January compared to December as Northeast prices rose, abetted by colder weather and higher gas prices, while Midwest and South Central markets weakened as temperatures averaged above normal in the Plains states, and gas prices fell. Loads in the East averaged 19 aGW below the prior year, tracking close to the forecast, with coal absorbing most of the drop in required generation. For 2015, we expect coal-fired generation to be down by 12.5 aGW and gas to increase by a similar amount. The rising call on gas-fired generation (outpacing capacity additions) and lower gas prices (CY15 Henry Hub averages $2.85, down 34%) is expected to lead to higher implied gas heat rates in most markets. CCGT (7K) spark spreads rise in Ontario, MISO Midwest and ERCOT, but declines are expected in the Northeast, PJM and MISO South as lower gas prices offset the impact of higher implied heat rates.
Israel to Mull Over Gas Price Caps
Israel's Finance Ministry is considering setting a maximum price for natural gas instead of imposing price controls, Israeli energy industry sources have said. The move to set a maximum price in the domestic market comes only two weeks after Israel's Public Utilities Authority (Electricity) rejected long-term agreements between the Tamar consortium and several private power producers saying that the price of gas was too high.
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.
PIRA Energy Group
3 Park Avenue, 26th Floor
New York, NY 10016