PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending May 24th 2015

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“Cheap” LNG Does Not Necessarily Drive More LNG Consumption, while U.K. Coal Closures to Be Offset by Efficiency and Renewables

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May supply and demand fundamentals have given us a preview of the balancing act the market must master in the weeks ahead.

NYC-based PIRA Energy Group reports that “cheap” LNG does not necessarily drive more LNG consumption. In the U.S., May supply and demand fundamentals have given us a preview of the balancing act the market must master in the weeks ahead. In Europe, Ukraine, the darling of gas bulls last summer did not pan out in terms of a spot price spike. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Global LNG Monthly Forecast

With close to a year into a low oil price regime, one thing stands out: “cheap” LNG does not necessarily drive more LNG consumption.

Price and CDD Pitfalls Loom

May supply and demand fundamentals have given us a preview of the balancing act the market must master in the weeks ahead. Disappointing gas burns in the power sector were offset by production declines in Appalachia and the Gulf Coast. The anticipated trade-off between recovering production and rising power sector gas burns will become increasingly crucial in the weeks ahead. The reason boils down to the need for a more aggressive narrowing of the year-on-year storage surplus in the wake of what is shaping up to be a very modest reduction in the overhang in May.

European Gas Price Scorecard

Remember Ukraine? The darling of gas bulls last summer did not pan out in terms of a spot price spike, but it is important to remember that it will remain a lingering issue in the months ahead when Russian gas prices will be plummeting further and European buyers will be looking for all types of methods and routes to nominate more Russian gas.

NYC-based PIRA Energy Group believes that U.K. coal closures to be offset by efficiency and renewables. In the U.S., power sector coal stocks continued to seasonally expand this month, despite stronger cooling demand in the eastern U.S. which has firmed natural gas pricing to near the $3/MMBtu mark. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

U.K. Coal Closures to Be Offset by Efficiency and Renewables

The announcement of further coal plant closures in the U.K. – Ferrybridge 3 and 4 – did not come as a surprise. PIRA already pointed out the uncertainties surrounding the coal-fired capacity, as a result of the disappointing results of the first capacity auction for 2018/19. While being unable to secure capacity revenues, the Ferrybridge units are among the oldest U.K. coal plants, having been brought online in the mid-1960s and suffered an extensive and damaging fire last year. Other U.K. coal plants that did not secure capacity revenues are also at risk of closure but increasing renewable generation and steep losses tied to efficiency are likely to counter the bullish impact coming from lower coal-fired availability.

U.S. Coal Stockpile Estimates

Power sector coal stocks continued to seasonally expand this month, despite stronger cooling demand in the eastern U.S. which has firmed natural gas pricing to near the $3/MMBtu mark. At the same time, railcar loadings are easing in the west, thereby slowing the pace of inventory expansion. PIRA estimates U.S. electric power sector coal stocks will be 189 MMst at the end of this month, or 80 days of forward demand based on our forecast of June/July average coal burns (it was 54 days one year ago).

Coal Storage Box Potential Threatens Gas Demand due to Forced Coal Burn

Storage constraints are not unfamiliar to the U.S. natural gas market, but physical limits on coal storage are fast approaching in some areas given skyrocketing coal stockpiles coupled with the delivery of deferred tonnage from transportation constraints during 2014. To the extent these physical limits become binding, power sector coal burns would be forced higher. At the same time, U.S. gas balances heavily hinge on incremental gas-fired power generation over the balance of the 2015 injection season given a massive year-on-year storage surplus and ongoing Lower 48 production growth. A pivotal part of the required gas demand growth will be from coal-to-gas switching stimulated by lower year-on-year gas prices and the retirement of coal-fired generating capacity. In all likelihood, lower summer gas prices will be needed to solve at least part of the problem.

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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