PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending June 7th, 2015

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The Supply Side Seems Focused Squarely on Challenging Coal for Supremacy in the Race to Join Forces with Renewable Energy to Meet Incremental Power Generation Demand, while French Prices Supported by Lower Coal Capacity and Exports

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Sometimes it's difficult to think of European gas markets as a proving ground for the next phase in the evolution of the global gas industry.

NYC-based PIRA Energy Group believes that the supply side seems focused squarely on challenging coal for supremacy in the race to join forces with renewable energy to meet incremental power generation demand. In the U.S., sticky storage surplus renewing downside price risks. In Europe, gas market has shown us is that being resistant to change in one area does not prevent change from occurring at its perimeters. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Global LNG Fundamentals Scorecard

Amid the widely told (and believed) story of LNG length in markets for the foreseeable future, the supply side of the gas industry is putting on a brave face in Paris this week at the World Gas Conference (WGC), but the language of its leaders is clearly taking a feisty turn. The supply side, led by a legion of LNG players with portfolio volumes looking for end-user markets, seems focused squarely on challenging coal for supremacy in the race to join forces with renewable energy to meet incremental power generation demand. In a nutshell, key figures at the WGC are offering up a policy driven solution to solve a commercial problem.

Sticky Storage Surplus Renewing Downside Price Risks

Thursday’s higher-than-expected storage build not only spurred the prompt month to test its late-April lows in the mid-$2.50s, but also highlighted the ongoing storage logjam in the Producing Region and the approach of similar risks in the Consuming East region, where today’s 73 BCF injection was the second largest ever and matched a shale-era high set the week ended June 9, 2012.

European Gas Price Scorecard

Sometimes it's difficult to think of European gas markets as a proving ground for the next phase in the evolution of the global gas industry. After all, this market was dragged kicking and screaming into the spot market era, and even today large portions of the market remain relatively uncompetitive by oil market standards. And yet what the European gas market has shown us is that being resistant to change in one area does not prevent change from occurring at its perimeters. We certainly saw this occur in the gas market for power generation over the past five years and the next phase of testing will occur in the form of integrating more LNG into supply mix.

NYC-based PIRA Energy Group believes French prices supported by lower coal capacity and exports. Coal pricing mixed amid limited supply disruptions/cuts and weak demand. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

French Prices Supported by Lower Coal Capacity and Exports

A number of fundamental factors will continue to underpin French prices. French demand appears to be stabilizing. While wind capacity is trending higher by 1 GW/year and solar by 0.8 GWs/year, RTE finally confirmed the closure of the last LCPD coal units — for a total of 1.25 GWs relative to the past summer. Finally, a key driver of the French price strength resides in higher exports toward markets that are pricing power at marginal costs for gas.

Coal Pricing Mixed Amid Limited Supply Disruptions/Cuts, Weak Demand

Coal pricing was somewhat mixed last week, with a rally in the Atlantic Basin early in the week (which was spurred by further transportation constraints on the Fenoco railroad in Colombia) fizzling out along with oil pricing, while FOB Newcastle (Australia) price moved slightly higher w/w. Strength in the Pacific likely stemmed from Glencore reiterating its plan to curtail production and exports this year, while Peabody announced a cutback in coking coal output in Queensland. Clearly, the market is not concerned about resupply, despite the lower ceiling on Colombian exports.

U.S. Coal Market Forecast

In recent weeks we have seen a handful of major producers issue layoff notices and/or declare Chapter 11 as they face the ultimate challenge in rationalizing excess supply in a very weak coal demand environment. We have been predicting that this day would arrive, and it appears to be upon us.

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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