PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending March 15th, 2015

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The Once Remote Possibility of Coal to Gas Fuel Switching in Asia Has Emerged, while Further Deterioration in the Economics of Conventional Generation across Europe

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As both oil linked contracted and spot prices in Asia have plummeted-- with the lagging effects of both finally starting to emerge--the once remote possibility of coal to gas fuel switching in Asia has emerged.

NYC-based PIRA Energy Group believes that the once remote possibility of coal to gas fuel switching in Asia has emerged. In the U.S., Thursday’s reported withdrawal came in above market consensus. In Europe, can spot prices stay or drift above oil-indexed levels during storage injection season? Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Global LNG Fundamentals Scorecard

As both oil linked contracted and spot prices in Asia have plummeted-- with the lagging effects of both finally starting to emerge--the once remote possibility of coal to gas fuel switching in Asia has emerged.

Prices Need to Help Gas Burns Counter Seasonal Slack

Thursday’s reported withdrawal of 198 BCF came in about 3-7 BCF above market consensus. On top of besting expectations, the magnitude of the draw was also impressive — it was the largest weekly withdrawal on record for any week in March. Even so, the report failed to buoy NYMEX futures as underscored by the prompt contract’s downside reversal of more than 10¢ off Thursday’s session highs.

European Gas Price Scorecard

The juxtaposition of the upcoming drop in oil-indexed gas prices over the next six months and an improving fundamental outlook – in no small part due to lower spot and contract gas prices – for gas balances offers a new and somewhat quirky twist on the direction of spot gas prices in the months ahead. We know that oil-indexed contracts prices will be falling in the next two quarters because of the massive drop in crude and oil products prices over the previous winter and even in the past week. The central question for buyers then becomes; can spot prices stay or drift above oil-indexed levels during storage injection season? It is extremely difficult for PIRA to see this happening on a sustained basis if at all.

NYC-based PIRA Energy Group believes that there is a further deterioration in the economics of conventional generation across Europe. In the U.S., real-time on-peak power prices increased from the prior month in Northeast and Midwest ISO-operated markets. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

European Electricity Markets Scorecard

The latest round of earnings results among generators highlights a further deterioration in the economics of conventional generation across Europe, but retirement decisions continue to lag well behind. These decisions of keeping loss-making plants operational clearly continue to exacerbate the oversupply in the German power market. In addition to flagging a drop in 2014 emissions, RWE also noted a “new CO2 purchase policy” in the call discussing their financial results, with purchases essentially postponed, while inventories of C02 are drawn.

Eastern Grid/ERCOT Market Forecast: March 2015

Real-time on-peak power prices increased from the prior month in Northeast and Midwest ISO-operated markets. Day-ahead spot prices were also higher in the Southeast. Temperatures averaged below normal in all regions East of the Rockies. Loads in the East increased by an estimated 11 aGW from January and were nearly 15 aGW above the prior year. The call on non-nuclear thermal generation rose by 13 aGW, with gas and oil up 20 and 3.5 aGW, respectively, while coal-fired generation fell by 10 aGW. Given changes to fuel prices and other input assumptions (including non-fuel operating costs), on-peak power price forecasts have also increased as have projected CCGT spark spreads.

After Lackluster Winter, Seasonal Thermal Coal Demand Fading

Coal pricing again moved lower last week, with sliding oil/gas prices and strength in the U.S. dollar neutralizing a slightly bullish rally in the coal market early in the week. The coal market is finding very little support these days, particularly amid a backdrop of falling oil prices. Fundamentally, Chinese demand remains soft, and aside from some actions taken by Glencore, the supply side remains sluggish to respond to the current low price environment.

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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