PIRA Energy Group's Weekly Natural Gas, Power and Coal Market Recap for the Week Ending August 2nd, 2015
New York, NY (PRWEB) August 03, 2015 -- NYC-based PIRA Energy Group reports that LNG send out in Europe is not responding to the shortage of gas in storage in many countries. In the U.S., heat wave tempers bearish near-term perceptions, but not for long. In Europe, the notion of treating imports as a form of just-in-time inventory is not a new concept, but it is one fraught with risk given the limited number of actual gas suppliers into the system. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:
Global LNG Fundamentals Scorecard
LNG send out in Europe is not responding to the shortage of gas in storage in many countries, and the global surplus in LNG will not necessarily lead to Europe being a passive dumping ground for volumes.
Damage Control
Hot weather put a bid under most prices outside of the NE in July. The gains, though, were largely limited to ~15¢ despite new record high daily gas burns that will lead to another large reduction in the year-on-year storage overhang. The market’s seeming indifference may be tied to the fact that the seasonal highs for CDDs have now passed. In addition, year-on-year storage surpluses in the U.S. and Canada are now all but assured going into the heating season. Moreover, if temperatures in August fizzle, downside price risks would expand given the threat of greater storage congestion, namely in the Producing Region. The challenges that region faces stem from supply displacement in the Midwest and Southeast tied to Appalachia production growth, which will intensify. In addition to lower prices at HH and nearby, stronger Consuming East injections and/or shut-ins could also be needed to balance the U.S. market.
European Gas Monthly Forecast
The recent dip in oil prices will work their way into the minds of storage holders; the question at hand will be if importing more during the winter may be less expensive than the carrying cost of importing more now. If these losses sustain through August, it will make sense for many buyers to cut back on injections in September and October, although the former is much more important from a volume perspective. The notion of treating imports as a form of just-in-time inventory is not a new concept in Europe, but it is one fraught with risk given the limited number of actual gas suppliers into the system. Here we see strategic and commercial realities at odds.
Heat Wave Tempers Bearish Near-term Perceptions, But Not for Long
While the market clearly was unimpressed with the recent below-anticipated build, the bullish impact of the current heat wave cannot be discounted, especially as the market has seen new daily EG gas burn highs.
European Gas Monthly Forecast
The recent dip in oil prices will work their way into the minds of storage holders; the question at hand will be if importing more during the winter may be less expensive than the carrying cost of importing more now. If these losses sustain through August, it will make sense for many buyers to cut back on injections in September and October, although the former is much more important from a volume perspective. The notion of treating imports as a form of just-in-time inventory is not a new concept in Europe, but it is one fraught with risk given the limited number of actual gas suppliers into the system. Here we see strategic and commercial realities at odds.
NYC-based PIRA Energy Group reports that hydro and changing flows drive up front prices. In the U.S., spot on-peak power prices averaged above June levels at all Western hubs in July. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:
Hydro and Changing Flows Drive Up Front Prices
The heat wave lifted demand by over 5 TWh across Western Europe vs. normal (over 2.4%), with Italy the most affected market (~3 TWh). After the Grexit scare, economic sentiment is up and has led to an increase in weather-adjusted loads to a 1.3% year-on-year in major markets (France, Germany, Italy and Spain). In addition, French and Italian hydro generation shrunk to a multi-year minimum, with water deficit also widening in the Alpine region. While German exports are surging, higher than expected thermal demand is set to keep prices firm through the end of the winter. However, policy developments and a weaker fuel pricing will weigh on deferred prices.
Western Grid Market Forecast
Spot on-peak power prices averaged above June levels at all Western hubs in July led by a $3/MWh increase at Mid-Columbia, driven by heat-related demand at the start and end of the month and weak hydro supply. Northwest on-peak implied heat rates averaged above 17,000 Btu/kWh in July basis Sumas gas. Heat rates weaken for the balance of the year but remain strong by historical standards as hydro operators attempt to fill reservoirs ahead of winter supporting gas burn. Despite relatively mild weather, Palo Verde implied heat rates were up 12% year-on-year in July averaging 11,700 Btu/kWh. California heat rates were up by only 5%. Stronger gains are projected for California for the balance of the year supported by lower imports from the Northwest along with weaker gas prices. Continued net capacity gains amid weak weather-adjusted loads and a likely recovery of hydro supply suggest summer 2016 market conditions will be weaker.
PIRA Delays Bullish Coal Price Outlook to Late-2016
Physical coal prices moved lower over the past month, with a weaker oil market, strong USD, and ongoing concerns over the health of the Chinese economy providing the majority of the bearish impetus. The upside to Asian coal demand has become more limited over the past month, with resurgent hydro generation in China and high stockpiles in India limiting the upside for demand. With supply remaining robust, we retain our bearish short-term outlook and push back our bullish outlook until late-2016. While Atlantic Basin coal demand got a shot in the arm due to the warm conditions across Europe, there is less upside for Atlantic Basin prices due to robust supply, and structural demand weakness. We retain a bearish outlook for CIF ARA and FOB Colombia prices throughout our short-term outlook. The strength in dry bulk freight rates and the fact that India's import demand is going on a bit of hiatus has and will continue to exert downward pressure on FOB Richards Bay pricing.
Tough Times Still Lie Ahead for Cape Freight Market
Cape freight rates recovered strongly in July, with much of the strength in the Atlantic after a flurry of fixing to haul iron ore to China soaked up available tonnage. Rises in Cape spot rates have been partly held in check, however, by a sharp fall in bunker fuel prices. On the demand side, we raised our forward demand assessments this month due to the recent accord between Vale and China. After a contraction in the Cape fleet in Q2, we have witnessed a pickup in Cape deliveries and a slowdown in demolitions, and we expect supply growth to begin leveling off in 2017. The net effect of all our changes has been to marginally increase our forward assessments of Cape utilization and, thus, we have a more bullish outlook for freight rates. We continue to forecast a difficult Cape market next year but we now expect to see a modest improvement in the latter part of 2017
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.
CONTACT:
PIRA Energy Group
3 Park Avenue, 26th Floor
New York, NY 10016
212-686-6808
sales(at)pira(dot)com
Media Relations, PIRA Energy Group, +1 212-686-6808, [email protected]
Share this article