PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending May 31st, 2015
New York, NY (PRWEB) June 03, 2015 -- NYC-based PIRA Energy Group believes that Japan appears to be dimming and it’s a mere foreshadow of the cloudy outlook ahead for the world’s largest buyer. In the U.S., for the third consecutive injection season bidweek, bullish steam has been abruptly let out of the newly minted prompt-month contract. In Europe, storage levels are well below last year (Ukraine-related panic buying) and the five-year average through the end of May, but you would never know it from the price of spot gas in Europe. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:
Global LNG Fundamentals Scorecard
As one of only two bright spots in Asian LNG demand this year, Japan appears to be dimming and it’s a mere foreshadow of the cloudy outlook ahead for the world’s largest buyer.
More Demand Headwinds Ahead
For the third consecutive injection season bidweek, bullish steam has been abruptly let out of the newly minted prompt-month contract. While the proverbial rubber hit the road with buyers perceiving more downside risk to price than otherwise, the fundamentals behind the reported injection, and what easily could be a record high build next week, stymied any renewed upward momentum.
European Gas Monthly Forecast
European storage levels are well below last year (Ukraine-related panic buying) and the five-year average through the end of May, but you would never know it from the price of spot gas in Europe. The air of calm in the European spot market demonstrates the core belief that ample supply options will be available in the months to come to meet the expected surge in gas demand for storage injections. Another reason the market is relatively unconcerned about storage levels is because gas demand projections, even at the winter peak, remain exceedingly low relative to the amount of storage capacity in the European market.
NYC-based PIRA Energy Group believes German summer prices will be Volatile and flow-based coupling will have only minor impact. In the U.S., spot on-peak prices at Mid-Columbia jumped in May, as hydro generation remained weak, the Columbia Generating station outage got underway, and gas prices rose. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:
German Summer Prices Volatile, Flow-Based Coupling Will Have Only Minor Impact
Germany continues to look oversupplied in the short term. The introduction of the flow-based market coupling has allowed Netherlands to take higher volumes of German power in certain hours, but overall German exports during May have remained closer to year-ago levels. Considering the expected amount of fossil fuel needs in Germany (27 GWs or so on average during 3Q 2015), German summer power prices will remain under a tremendous downward pressure and will fluctuate wildly as prices are now being set in a relatively steeper section of the merit order, made up of lignite and coal units with significant differences in efficiencies and marginal costs. However, from a broader standpoint, we believe the market is trading at — or near — a bottom, assuming current fuel prices. Structurally, German coal-fired dispatching is down to the bone and the German forward curve is factoring in this assumption as well.
Western Grid Market Forecast
Spot on-peak prices at Mid-Columbia jumped in May, as hydro generation remained weak, the Columbia Generating station outage got underway, and gas prices rose. Southwest markets were little changed with a modest gain at NP15 and declines at SP15 and Palo Verde. Hydro output projections have been revised down again based on new runoff projections. June-September NWPP U.S. hydro generation is expected to average 12.1 aGW, down 0.6 aGW from last month and 3.2 aGW below the prior year. This will push the call on gas-fired generation above 7 aGW, an increase of 1.8 aGW from last year. Combined with the reduction in gas prices (down 36% y/y), the increased call on gas should continue to boost implied heat rates. These have been revised up to 12,600 Btu/kWh during this period from 12,150 in last month’s report. Southwest load and generation projections have not been revised significantly from last month. As a result, the call on gas-fired generation is virtually unchanged and implied heat rates are only slightly higher.
Near-Term Upside to Remain Limited for Global Coal Pricing
Coal prices generally eased over the past month on a weaker oil complex and a downward adjustment from the supply disruption-spurred rise in pricing in April. Physical and paper FOB Newcastle (Australia) price faded, with weak fundamentals not providing much support to pricing. With some supply-side adjustments and stronger oil pricing on the horizon, PIRA takes a modestly bullish outlook toward pricing in the latter stages of 2016 in the Pacific Basin. In the Atlantic Basin, our expectation of continued weakness in European coal demand coupled with recovering (and fundamentally robust) supply will keep CIF ARA (Northwest Europe) pricing lagging behind FOB Newcastle, while weak dry bulk freight rates and demand growth from India will provide a lift to FOB Richards Bay (South Africa).
Iron Ore Supply Expansion Powers on with Chinese support for Vale
There is little grounds for short-term optimism over the Cape market outlook given stagnant global steel production, the state of the Chinese steel sector, and the fall in Chinese coal imports. However, in the medium term, the rapprochement between China and Brazil and recent Chinese backing of Vale’s iron ore expansion plans should provide a potential boost to overall Cape demand. This support does provide grounds for increasing our assessment of Brazil’s share of the Chinese imports ore market, offering some hope for improved Cape freight rates in late-2016 and 2017.
Environmental Markets - CA Carbon Spot Auction Neutral; Future Vintage Undersubscribed
The May California-Quebec joint carbon allowance auction demonstrated the successful absorption by the market of high volumes of current vintage allowances, though the V-18s were undersubscribed. The current vintage cleared at $12.29 with a healthy coverage ratio of 1.16. The number of bidders was up considerably for this auction, posting a new high of 96.
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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