PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending February 22nd, 2015

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Strategies Emerge for Keeping LNG Trains Operating amid Weak Seasonal Demand, while As Key Vote Approaches Volatility in EUA Prices Impacts Power Prices

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It is widely agreed that the LNG market is heading into a soft patch that may persist for some time...

NYC-based PIRA Energy Group believes that strategies are emerging for keeping LNG trains operating amid weak seasonal demand. In the U.S., consensus estimates proved to be only slightly below the EIA’s reported withdrawal. In Europe, supply options take distinct positions for injection season. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Strategies Emerge for Keeping LNG Trains Operating amid Weak Seasonal Demand

It is widely agreed that the LNG market is heading into a soft patch that may persist for some time. Between the relatively casual rate at which China and India are increasing imports and the sizable amount of new LNG supply – large volumes remain un-contracted to end users – scheduled to enter the market in the coming year, it’s looking like a much stronger possibility that some production will have to be shut in; or as it's called in the LNG business.

Cold but No Bullish Enthusiasm

Consensus estimates for Thursday’s report calling for a pull of 106-110 BCF proved to be only slightly below the EIA’s reported withdrawal of 111 BCF. The draw widened the inventory surplus to last year by a striking 136 BCF and pushed inventories above the five-year average for the first time since 2014.

Supply Options Take Distinct Positions for Injection Season

Focus on Dutch gas production has died down considerably in the past week, as year-on-year losses in gas supply from Groningen are actually smaller than the year-on-year increases from Norway. The bigger issues that will continue to dictate price direction in the months ahead will be how Russian gas and LNG imports square off for the injection season to come. At the moment, the year-on-year decreases in Russian exports have been reduced to 161-mmcm/d due to a year-on-year increase in weather-related gas demand. The weather outlook is still slightly warmer than normal, but nothing like last year's tropic levels.

Korea’s Gas Users Receive Another Price Reduction

The Korean government will cut the price of gas sourced from LNG supplied by the state-run Korea Gas Corp. (KOGAS), by an average of 10.1% from next month to reflect the recent fall in oil prices, the energy ministry said Sunday. The price cut is the second of its kind in just two months.

Growing Risk of Production Shut-ins

Mild weather in western Canada has reduced reliance on storage and bolstered February cross-border flows by ~0.5 BCF/D year-on-year in the process. The western withdrawal for the full month is expected to average 1.3 BCF/D, only about one third of the year-ago pace. Meanwhile, Canadian gas rig counts have finally given way to year-on-year losses, but momentum in place should still lead to year-on-year western Canadian production growth, and thus higher net exports, through the injection season. The risk of price-induced supply curtailments cannot be discounted.

NYC-based PIRA Energy Group believes that as key vote approaches, volatility in EUA prices impacts power prices. In the U.S., the rallies that coal prices have had over much of February-to-date stalled and moved the other way last week. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

As Key Vote Approaches, Volatility in EUA Prices Impacts Power Prices

The German year ahead contracts continue to follow a volatile fuel pricing complex, with the EUA itself trading around specific political developments, regarding, in particular, the proposed Market Stability Reserve (MSR). With the vote in the Parliament’s Environment Committee now approaching, it seems that something similar to the EPP compromise (a 2019 start, and at least a partial transfer of back-loaded allowances) has already been built into current prices. However, different policy options could still emerge, changing the pricing picture significantly.

Thermal Coal Rally Loses Steam

The rally that coal prices have had over much of February-to-date stalled and moved the other way last week, with forward prices retracing some of the prior week’s gains. Weaker oil and gas prices, along with Drummond announcing that its coal production will increase to ~30 MMmt in 2015 (up from 26.8 MMmt in 2014 despite the weakness in pricing and the railroad limitations in Colombia) were factors in this downward correction.

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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