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NYC-based PIRA Energy Group believes that French and German forward price spreads will stay wide, while Chinese seaborne thermal coal demand soften

20 Mar 2014

NEW YORK: NYC-based PIRA Energy Group believes that global LNG demand is set to tumble. In the U.S., Thursday’s EIA report highlighted the market’s continued above-normal reliance on inventories. In Europe, PIRA remains relatively unconcerned about a cut-off in gas flows through Ukraine. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Global demand is set to tumble
Global demand is set to tumble starting next month and weak signals from key counter-seasonal markets like Brazil and India are emerging too. Spot price floors will be kept by a strong round of seasonal maintenance in Qatar in particular.

The market's continued above-normal reliance on inventories
The EIA reported a withdrawal of 195 BCF in its weekly update, which fell short of consensus estimates straddling 200 BCF. Nonetheless, Thursday’s report highlighted the market’s continued above-normal reliance on inventories, with the stock draw coming in ~50 BCF above the year-ago figure and ~100 BCF more than the five-year average. News of the underwhelming stock change, though, added to losses in place at the opening, with the prompt NYMEX contract initially shedding ~5¢ before ultimately settling at ~$4.38.

PIRA remains relatively unconcerned about a cut-Off in gas flows through Ukraine
PIRA remains relatively unconcerned about a cut-off in gas flows through Ukraine because it is in neither side's interest in allowing this to happen. We are even less concerned about a wholesale stoppage of Russian gas exports to Europe, even if some sort of E.U. or German-based sanctions were to emerge. The real concern for Ukraine itself is not now or even 2Q and 3Q, but next winter.

Argentina to cut energy subsidies in half
Argentina will gradually cut subsidies in half on utilities, Cabinet Chief Jorge Capitanich told the Senate. Argentina’s government will spend 2-2.5% of GDP on subsidies including water, natural gas and electricity. The government currently spends 4-5% percent of GDP on subsidies, paying nearly three times as much to buy natural gas abroad as what it costs to produce domestically.

NYC-based PIRA Energy Group believes that French and German forward price spreads will stay wide, while Chinese seaborne thermal coal demand softens. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

French and German forward price spreads to stay wide
While most of Western European day-ahead markets have been successfully coupled and significant progress has been made toward the European single market, power price spreads among major markets are still fluctuating wildly. Going forward, power price bases appear a wild card, as markets are taking different paths in terms of regulation, from the planning of capacity mechanisms and/or support to renewable sources, while the incumbents responses to the deep crisis of the conventional fleet have also been considerably different from market to market. The price misalignment between France and Germany on a forward basis is very telling and suggests diverging fundamentals.

Chinese Seaborne Thermal Coal demand softening
Coal prices, particularly the front end of the curve, rebounded this week, with 2Q14 FOB Newcastle (Australia) and API#2 (Northwest Europe) rising by the largest extent, while API#4 (South Africa) rose to a lesser degree. Despite this small rally in pricing, it is difficult to take a bullish outlook for the seaborne coal market, particularly with Chinese coal demand relatively weak and supply set to grow when Colombian export supply returns to normal. Compounding this situation has been mild weather across most of Europe, which is likely to curtail coal buying activity in 2Q/3Q.


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