PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending March 1st, 2015

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In South America Demand Run Up Has Started Well Ahead of the Historic Peak, while France Aligned to Marginal Costs of Gas and German Oil-linked Gas Units More Competitive

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When April prices receive a bounce towards the end of a lackluster winter buying season, it usually means that counter-seasonal demand is starting to kick in from South America and interest from Mideast buyers is also beginning to emerge.

NYC-based PIRA Energy Group believes that in South America, a fundamental pillar of counter seasonal demand, the demand run up has started well ahead of the historic peak. In the U.S., the expected extension of cold weather into March cannot be ignored, but we foresee underlying bearish fundamentals. In Europe, Russia is once again raising the specter that Europe could lose its Russian gas supply indirectly amid its squabble with Ukraine. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Global LNG Fundamentals Scorecard

When April prices receive a bounce towards the end of a lackluster winter buying season, it usually means that counter-seasonal demand is starting to kick in from South America and interest from Mideast buyers is also beginning to emerge. In South America, a fundamental pillar of counter-seasonal demand, the demand run-up has started well ahead of the historic peak.

An Even Colder March Ahead, but New Bearish Headwinds

The expected extension of cold weather into March cannot be ignored, but we foresee underlying bearish fundamentals — as reaffirmed in last week’s report — continuing to hold the upper hand against any short-term cold-induced bullishness.

European Gas Monthly Forecast

Russia is once again raising the specter that Europe could lose its Russian gas supply indirectly amid its squabble with Ukraine. The problem with this line of reasoning is that Russia would be taking away gas that European buyers do not even want; at least not yet. At the peak of the winter demand period, Russian gas exports have dropped to their lowest level — for any time of year — since 2011. Every indicator suggests that this drop is based on lower nominations by the buyers and not lower exports by the sellers. At the same time, Europe set an all-time monthly record for the second month in a row on storage withdrawals despite warmer-than-normal weather throughout the entire 59-day period. Europe is also increasing its LNG send-out and will continue to do so, as the supply push will grow amid a seasonal collapse in Asian gas demand during the second quarter and new supply availability. The LNG market is undoubtedly long and will remain so through the second quarter.

NYC-based PIRA Energy Group believes that France aligned to marginal costs of gas. In Germany, oil-linked gas units are more competitive. In the U.S., western spot power prices declined for a third consecutive month in February as warmer than normal weather slashed heating demand and boosted Northwest hydro generation. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

France Aligned to Marginal Costs of Gas; In Germany, Oil-linked Gas Units More Competitive

French day-ahead prices have remained aligned to marginal costs for gas during February, with this trend being essentially driven by stronger weather-related demand together with a shortfall in wind and hydro generation. French net exports narrowed to only 4.2 GWs/day, the lowest since December 2013, with flows toward gas-dominated markets once again more affected. The German market continues to look oversupplied in the upcoming months. While the economy is doing better, there is still little sign of power demand growth. At the same time, if we assume renewable generation at the levels factored in the 2015 EEG surcharge calculations, the outlook for fossil fuel generation remains dim. Additionally, the collapse in oil prices implies that oil-linked contract gas will steadily move lower in the upcoming months, with a bottom now calculated by October 2015. Marginal costs of these units should move toward the mid €30s/MWh, overlapping quite a large section of the inefficient coal stack. This dynamic may further undermine German forward peak prices.

Western Grid Market Forecast: February 2015

Western spot power prices declined for a third consecutive month in February as warmer-than-normal weather slashed heating demand and boosted Northwest hydro generation. Above-normal temperatures have increased Columbia Basin runoff during the past three months, but have also depleted snowpack. As a result, hydro generation is expected to be below normal for at least the next few months. Given the scheduled outage at the Columbia station and low gas prices that should keep coal units turned down, the call on gas should increase sharply (~1.8 aGW). The combination of a higher call on gas-fired generation and very low gas prices (averaging $2.20/MMBtu at Sumas through June) should yield unusually strong spring implied heat rates with 2Q15 averaging 9,700 Btu/kWh. The call on gas-fired generation is also expected to rise in the Southwest during the spring as a result of lower nuclear generation, declining imports from the Northwest, weak hydro output and low gas prices.

Atlantic Basin Coal Fundamentals in the Spotlight

FOB Newcastle (Australia) prices were range bound in February, with Chinese buying on hiatus due to the Lunar New Year. The weakness in Asian demand has kept FOB Richards Bay (South Africa) more aligned with Atlantic Basin fundamentals, which, along with CIF ARA (Europe) prices, have been swayed by the supply situation in Colombia and slightly higher-than-expected coal demand in Europe. PIRA believes the oil market will move lower in the next several weeks, which will heap more pressure on coal 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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