With crude prices collapsing during the past six months, a considerable amount of debate has emerged over how long it would take for Asian contract prices to fall as well.
New York, NY (PRWEB) April 01, 2015
NYC-based PIRA Energy Group reports that with crude prices collapsing during the past six months, a considerable amount of debate has emerged over how long it would take for Asian contract prices to fall as well. In the U.S., The EIA’s penultimate storage update for the 2014-2015 heating season revealed a 12 BCF injection. In Europe, while possessing the second most amount of gas demand, the U.K. has the smallest amount of storage cover of any of the major gas consuming countries in Europe. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:
Global LNG Fundamentals Scorecard
With crude prices collapsing during the past six months, a considerable amount of debate has emerged over how long it would take for Asian contract prices to fall as well. The truth is that most contracts, based off of the average import price for Japanese crude oil (JCC), use between a one and four month lag. By no means is there a singular contract price. Making this assessment is important because it sheds light on how heavily Atlantic Basin spot cargos will need to be discounted in order to keep LNG production from shutting in, which no producer wants to do. If Atlantic Basin flows to Asia are to remain as high as they were through January, it's going to take some low prices to move volume in the second quarter, which is the seasonal nadir for Asian gas demand. It will be critical to discount spot LNG in the months and quarters ahead in order to keep crude, NGL, or condensate flowing.
April Stress Test Underway in North American Gas Market
The EIA’s penultimate storage update for the 2014-2015 heating season revealed a 12 BCF injection. The range of estimates defining the market was quite large with expectations stretching from a single-digit draw to injections above 20 BCF. In spite of the benign “miss” versus consensus estimates, the market took the prompt contract down ~5¢, to settle at ~$2.67 — its lowest level since early March. That bearish response could indicate that lower prices are in the offing given the material amount of coal-to-gas switching needed in April/May.
European Gas Price Scorecard
While possessing the second most amount of gas demand, the U.K. has the smallest amount of storage cover of any of the major gas consuming countries in Europe. So any time something happens in U.K. storage, it can tend to have an outsized effect given the amount of trading liquidity in NBP. The U.K.’s largest storage facility at Rough has been placed under capacity restrictions and it will further limit the country’s already limited storage.
NYC-based PIRA Energy Group believes as nuclear availability shrinks, Belgium prices firm, pushing imports up. In the U.S., coal prices rebound but upside remains limited. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:
As Nuclear Availability Shrinks, Belgium Prices Firm, Pushing Imports Up
In Belgium, nuclear availability shrunk further this past week as another unit was disconnected for planned maintenance. We expect nuclear output to stay at particularly low levels through at least most of the second quarter, making Belgium structurally dependent on imports. With French demand set to move lower during the second quarter as a result of seasonal factors, France naturally becomes the first choice for Belgium to meet its needs, acting as support for French prices.
Coal Prices Rebound but Upside Remains Limited
Coal prices continued to strengthen last week, with a stronger overall energy complex and weaker U.S. dollar pushing the market higher. API#2 (Northwest Europe) prices generally moved higher than API#4 (South Africa) and FOB Newcastle (Australia), perhaps buoyed by a stockpile reduction at ARA. Fundamentally, the market remains awash with supply, and coal demand is limited to the upside, particularly with low gas pricing threatening coal dispatch in Europe and South Korea. The supply side is experiencing some tightening from the night rail ban in Colombia and Glencore’s announced plans to cut production and export over 2015.
Freight Rates Recover from All-Time Lows, Outlook Remains Bleak
Last month, we reported that that Baltic Dry Index (BDI) fell to 509, the lowest figure since records were first published at the start of 1985. This month (March), there has been a modest improvement. The recovery in the Cape market has been hit by the drop in Chinese coal imports, which are down 45% year-on-year in the first two months of the new year, and hopes of a pickup in Chinese steel demand have withered away. With China’s steel sector outlook having weakened, we believe that any eventual recovery will now start from a lower base.
Environmental Markets- Korean ETS Update: Lower Gas Prices May Allow Carbon to Play a Role in Switching
Trading in the Korean Emissions Trading System is very thin and emissions allowance (KAU) prices remain near the government-set reference price. However, thermal fuel prices have declined, particularly LNG. The gap between coal and gas electric generation may soon be small enough to be filled in by the carbon price and coal import tax obligations. Implied CO2 costs may be low enough to incentivize fuel switching this summer, leading to lower power sector emissions and KAU demand. At the same time, there appears to be limited available KAU supply, which may have already started to incentivize CER cancellations.
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.
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