PIRA Energy Group’s Weekly Natural Gas, Power and Coal Market Recap for the Week Ending July 5th, 2015

NYC-based PIRA Energy Group believes that the new era in global gas is the U.S. as LNG supplier on a large scale. In the U.S., new EIA monthly updates through April point to higher production. In Europe, the third quarter is, by far and away, the lowest period for gas demand during the calendar year. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:
Global LNG Fundamentals Scorecard
An initial Asian spot deal for $7.20/MMBtu sourced from Australia is actually a harbinger of a new era in global gas: that of the U.S. as LNG supplier on a large scale. It also strongly suggests that some good deals are available in Australia on FOB cargos to keep the trains operating at a higher capacity.
New EIA Monthly Updates through April Point to Higher Production
The release of the EIA’s April Monthly came with a wealth of new supply data as the agency expanded coverage to include monthly production statistics from 10 additional states. The data were retroactive through the first quarter of 2015 and provided considerable insight into former discrepancies between PIRA and the EIA in the once-opaque “Other States” category.
European Gas Monthly Forecast
The third quarter is, by far and away, the lowest period for gas demand during the calendar year. While the year-on-year growth in gas demand we have seen in the first half of the year will continue in the third quarter, the volume of growth in absolute terms will be so small as to be hardly noticeable in the gas balances. The third quarter is often useful for understanding the outlook for underlying gas demand growth, as the role of weather is severely diminished in most cases. The recent heat wave will offer some support to gas demand, as we have already seen in France, but we tend to focus on 3Q as a period when we learn more about underlying gas demand in sectors such as industry. The conclusion we are reaching is that some recovery is occurring in places like Spain and the U.K., but efficiency gains in gas consumption and renewables substitution in emerging lower carbon markets continue to stymie growth in most other places.
NYC-based PIRA Energy Group reports that hot weather underpins spot, while key policy decisions impact the curve. In the U.S., spot on-peak power prices rose at all Western hubs in June. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:
Hot Weather Underpins Spot, while Key Policy Decisions Impact the Curve
The European markets are facing a hot summer on a number of fronts. The implosion of the Greek crisis should have a muted impact on European power. However, the implementation of the Flow-based market coupling is impacting cross-border Net Transfer Capacities and flows, while extremely high temperatures are currently underpinning demand and leading to water cooling issues. We will review more closely the freshly announced measures by the German Ministry. While largely in line with the rumors circulating over the past few weeks, this recent round of policy decisions provides a clearer indication that German lignite generation will get hit.
Western Grid Market Forecast
Spot on-peak power prices rose at all Western hubs in June with Mid-Columbia up $10/MWh from May, SP15 up $9, Palo Verde $8 and NP15 $3. Continued dry weather has led to further downward revisions to Northwest hydro output. The changes will boost the call on gas-fired generation and reduce net power flows from the region leading to stronger on-peak prices for the balance of the summer. Mid-Columbia heat rates (basis Sumas gas) are expected to remain above the recent historic range through November. California summer prices have also been revised up in response to higher Northwest prices, consistent with a reduction in net imports from that region. In addition, SoCal border gas prices are expected to be a little stronger partly in response to higher power sector burn and lower inventories.
PJM Capacity Prices: Higher Due to VRR and CP Changes
PJM’s Reliability Pricing Model (RPM) will undergo significant changes during upcoming auctions, including the 2018/2019 Base Residual Auction (BRA). PJM plans to define a new capacity product, Capacity Performance, with different characteristics and performance penalties than the previous Annual Capacity product. In light of these changes, PIRA’s view for the upcoming 2018/19 Base Residual Auction (BRA) is that it is likely to clear somewhat stronger than the previous (2017/18) auction, i.e. in range of $130-$160/MW-day for the RTO. However, subsequent auctions could clear at even higher prices as the capacity performance rules tighten further. We take a look at the auction from the lens of supply-demand and the recent auction rule changes.
Downside Risks to Coal Pricing Dominate Despite Rally in July
Physical coal prices continued their modest rally in July, as continued supply constraints in Colombia and Russia combined with some reduction in exports from Indonesia to push the coal market higher. For the Pacific Basin, PIRA believes that the risks remain to the downside in prompt pricing, particularly with the strength in the USD, a lack of discipline in Australian supply, and further weakness in Chinese imports. We believe China’s demand will stabilize in late 2015, which leads us to a modestly bullish outlook for 2016 prices. Due to weaker European coal demand, we believe Atlantic Basin prices will struggle to keep pace with those in the Pacific Basin, and we have a more neutral outlook for 2016 CIF ARA and FOB Richards Bay prices.
Long Awaited Supply Tightening Beginning to Appear
The rally in coal pricing seemed to run out of steam last week, with the combination of generally unsupportive supply and demand fundamentals and the economic uncertainty surrounding Greece and the euro zone proving too much for the market bulls to carry. Despite a heatwave over much of Europe providing some upside to demand, API#2 (Northwest Europe) bore the brunt of this bearish pressure, with 3Q15 pricing falling W/W. If Greece breaks the wrong way, it could severely damage the euro, adding additional downside pressure to CIF ARA prices. API#4 (South Africa) and FOB Newcastle (Australia) 3Q15 prices also fell, but to a slightly lesser extent than API#2. While there are signs that the supply side is (finally) tightening, the upside is limited for pricing.
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.
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