PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending April 12th, 2015

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Asian Spot Prices in the Second Quarter Are Once Again Buckling Under Pressure from Weak Global LNG Fundamentals, while Italian Day-Ahead Prices Likely to Stay Weak

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Keep your eye on the increasingly decisive role that Europe will play in LNG markets this summer because it will offer a preview of years to come.

NYC-based PIRA Energy Group reports that Asian spot prices in the second quarter are once again buckling under pressure from weak global LNG fundamentals. In the U.S., The EIA reported a bearish injection. In Europe, The unique aspect that Europe plays in the LNG market is that it is just as important for what it does not buy as for what it does due to the surge in re-exporting LNG. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Global LNG Fundamentals Scorecard

Asian spot prices in the second quarter are once again buckling under pressure from weak global LNG fundamentals — combined with a new round of selloffs in crude markets. As a result, the need to optimize every aspect of a company's LNG assets has never been more important. At the essence of the purchase of the BG Group by Royal Dutch/Shell is the desire to achieve such a goal, with the latter rounding out its portfolio with the assets of the former. BG was heading into difficult territory on several fronts due to the collapse of crude prices, and the lack of an end-user market for the massive amount of LNG equity production and contracted supply on its books. On all these fronts, Shell is well positioned to help itself.

Gas Balance Tightrope Tightens

The EIA reported a bearish injection of 15 BCF relative to 9-11 BCF general refill expectations. Given the surprise, NYMEX price action was decisively geared to the downside as the contract fell to a new low of ~$2.52 after the release before closing the day at ~$2.53, down ~8¢. The current week’s HH price erosion ahead of last week’s EIA report signaled the market’s earliest physical reality phase. Seasonal heating load losses have begun to underscore the market’s difficult transition to at least partially offset those losses with rising gas-fired EG.

European Gas Price Scorecard

Keep your eye on the increasingly decisive role that Europe will play in LNG markets this summer because it will offer a preview of years to come. The unique aspect that Europe plays in the LNG market is that it is just as important for what it does not buy as for what it does due to the surge in re-exporting LNG. At the moment, European send-out from its wide variety of terminals is well down in April versus March for reasons that are not entirely clear. With Norwegian field and processor maintenance starting to shut down today and last over the next two weeks, PIRA expects a strong turnaround in LNG flows that will take volumes back near March levels of around 150-mmcm/d.

NYC-based PIRA Energy Group believes that Italian day-ahead prices likely to stay weak. In the U.S., against a backdrop of mid-$2/MMBtu NG pricing and stronger nuclear output, power sector coal burn looks to plumb depths not seen since 1986. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Italian Day-Ahead Prices Likely to Stay Weak

While French prices continue to show some resilience, the dynamics in the Southern interconnectors, primarily Italy, are looking quite dim. Italian day-ahead prices have averaged only euro 46.2/MWh during April, coming only slightly above their French counterparts, with a very modest spark spread. PIRA believes Italian day-ahead prices in the upcoming months will continue to be undermined by relatively stronger hydro reserves and declining contract gas prices, lagged to oil. Only somewhat stronger demand is countering these bearish factors, but demand growth is overall too small to matter.

U.S. Coal Market Forecast

Against a backdrop of mid-$2/MMBtu NG pricing and stronger nuclear output, power sector coal burn looks to plumb depths not seen since 1986. As gas production remains resilient, PIRA expects significant coal-to-gas switching over the next six months, thus spiking coal stocks. The international coal market remains in the doldrums as well, increasing financial pressures on U.S. coal producers. Additional bankruptcies look inevitable at this point.

Environmental Markets -No Clarity on EU Carbon Policy Fix Expected in April

EUA prices continued to fall in March after EU President Latvia supported a Market Stability Reserve proposal that was weaker than the proposal from the EU Parliament’s Environment Committee. Prices were buoyed by a German domestic CO2 proposal involving EUAs. Trialogue MSR negotiations will continue in May, with a month of backroom negotiations to digest in the meantime. ICE EUA open interest is down considerably YOY for deliveries beyond 2015, while demand at EUA auctions is also weak.

Environmental Markets - Weaker Hydro, Cheap Diesel/Gasoline: Bullish California Emissions

California carbon prices in March averaged $12.65, just below our $12.70 expectations for the month. CCAs are trading below the minimum possible reserve price for 2016 and intra-2015 delivery price spreads remained compressed. PIRA has weakened our expectations of CA hydro generation for the water year. Minimal changes to gas and diesel price forecasts to point to higher year-on-year transport emissions. Discussion of 2030 interim target scenarios is coming to the fore.

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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