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

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Lower Prices and Wider Availability of Spot Supply in the Atlantic Basin Should Have Translated into a Buying Bonanza for Counter Seasonal Buyers in Mexico and South America, while Swiss Imports from France down Year-On-Year, with Prices Moving Closer to Germany

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With Asian buying quieter and the west-east arbitrage window closed, lower prices and wider availability of spot supply in the Atlantic Basin should have translated into a buying bonanza for counter seasonal buyers in Mexico and South America, but ...

NYC-based PIRA Energy Group believes that lower prices and wider availability of spot supply in the Atlantic Basin should have translated into a buying bonanza for counter seasonal buyers in Mexico and South America. In the U.S., bearish price risks intensify. In Europe, unlike winter, Ukraine’s supply alternative sleeps. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Global LNG Fundamentals Scorecard

With Asian buying quieter and the west-east arbitrage window closed, lower prices and wider availability of spot supply in the Atlantic Basin should have translated into a buying bonanza for counter seasonal buyers in Mexico and South America, but this purchasing pattern has not borne out.

Bearish Price Risks Intensify

Following two weeks of gas-fired EG burns above 30 BCF/D, the Reference Week’s volume fell below that mark and is expected to remain below that threshold for next week’s report as well. Estimates for the week ending July 10 promise to close out the first half of July with a sizable below-normal CDD accumulation. Any continuation of the cool pattern we have seen would pose further downside risk to our latest full-month estimate and increase pressure on August gas burns, the last month of the peak cooling season.

Unlike Winter, Ukraine’s Supply Alternative Sleeps

As promised, restrictions on Russian gas flows appear to be having an impact on Ukrainian gas injections, but not necessarily on transit flows through the country. Additional Russian pipeline volumes are making their way through Ukraine itself and through the Nord Stream pipeline into Germany via the Baltic Sea. Here's where it becomes tricky. The increase in flows through the Nord Stream-connected Opal pipeline in Germany would make sense if we were seeing more gas flowing back into Ukraine via the Czech Rep. at Lanzhot and Slovakia at the Budince connection point. However, this flow is not happening at the moment and is leaving Ukrainian storage injection levels at much lower rates.

Gas Price Pooling For India’s Urea Producers Set to Be Effective From August 1

Under the plan, the price of cheaper domestic gas will be averaged or pooled with cost of expensive imported LNG to create a uniform rate for fertilizer plants. Fertilizer plants consume about 42.25-mmcm/d for manufacture of subsidized urea. Out of this, 26.50-mmcm/d comes from domestic fields and the remaining 15.75-mmcm/d is imported LNG.

NYC-based PIRA Energy Group reports that Swiss imports from France are down year-on-year, with prices moving closer to Germany. In the U.S., coal production cuts continued to accelerate during 2Q15, mitigating some of the increase in coal stocks. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Swiss Imports from France Down Year-On-Year, With Prices Moving Closer to Germany

Swiss imports from France have been declining steadily over the past few months, with the most recent declines in French flows toward Switzerland quite substantial – over 2 GWs year-on-year - and are even more interesting if we put them in the context of drier hydro situation in the Swiss Alps. Swiss pricing has been moving closer to Germany and away from France, a rare outcome on a spot basis in recent memory, but now also factored along the curve.

U.S. Coal Market Forecast

Coal production cuts continued to accelerate during 2Q15, mitigating some of the increase in coal stocks. Unfortunately, net U.S. gas supply grew by 4.7 BCF/D (6.3%) year-on-year during 2Q15, placing downward pressure on NG prices, increasing coal-to-gas substitution. We believe PIRA’s bullish view on 2016 oil and gas pricing bears watching beyond our near-term horizon.

Modest Decline in Coal Pricing Despite Stiff Headwinds

The coal market moved broadly lower last week, but considering the Greek vote and the steep decline (although subsequent partial rebound) in Chinese equity markets, the decline in price was rather modest. For 3Q15 pricing, API#2 (Northwest Europe) and API#4 (South Africa) fell less than $0.50/mt, while FOB Newcastle (Australia) prices rose slightly W/W. Price declines were generally sharper along the forward curve, perhaps due to growing pessimism regarding the Chinse economy and coal demand levels. The market still requires tightening on the supply side to rebalance in the short-term, and demand growth in the long-term. We believe that demand growth is coming in 2016/2017, but the needed supply cuts are by no means for certain.

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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