NYC-based PIRA Energy Group believes that the tighter LNG supply outlook extends further into 2014. Price volatility realized in the western U.S.
markets last month shifted east along with the arctic-air intrusions in January. In Europe, gas fundamentals take a
significantly bearish turn. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:
Tighter LNG Supply Outlook Extends Further into 2014
BG’s recent announcement of force majeure on its Egyptian volumes comes as no surprise. Overall exports from Egypt have
been gradually dwindling since the early days of regional political upheaval. But the specification that BG's coalseam
LNG project in Australia is now set for 4Q of this year from the broader 2H 2014 target date indicates that the market
will remain tight through next winter, particularly as China has a vast new tranche of import capacity to fill and Japan
is boosting gas-fired generation capacity with dim expectations for significant nuclear restarts any time soon.
North American Gas Regional Monthly
Price volatility realized in the western U.S. markets last month shifted east along with the arctic-air intrusions in
January. With the Midwest and Northeast facing the brunt of the polar vortex, the resultant demand impact in these
R/C-heavy markets (as well as heating gains in the South) was powerful enough to yield material support for Henry Hub —
unlike a month ago. Stock levels likely to be plumbed in the East should be raising alarms at LDCs, especially with
weather forecasts carrying the cold weather into mid-February. Consuming East stocks approaching critically low levels
next month would likely exert even greater upward pressure on Henry Hub than seen so far.
Gas Fundamentals Take a Significantly Bearish Turn
A significant warming trend is taking the edge off of gas demand in early February, which is normally the highest demand
period of the year. Temperatures are moving higher, power sector gas demand is moving lower, and industrial gas demand
is moving nowhere at best and overseas at worst. In the months to come, supply cuts will have to play a larger role in
balancing the market if gas producers hope to keep spot prices within close range of oil-indexed prices. Unquestionably,
the starkest change in the market that reflects a more bearish tone has occurred in working gas storage.
NYC-based PIRA Energy Group reports large demand losses depress the front of the power curve. In the U.S., the ridge of high pressure that had been
blocking precipitation from reaching the West Coast has broken down this week, but it will take sustained wet weather to
offset dry conditions for the water year to date. Specifically, PIRA’s analysis of electricity and coal market
fundamentals has revealed the following:
Large Demand Losses Depress the Front of the Power Curve
Massive demand losses, primarily induced by warmer weather conditions, have emerged during January, together with
stronger availability at the low end of the stack. Losses have been particularly severe in the French market, as demand
has collapsed to the 10-year minimum. Wind generation has surged, now ranking only third in the French fuel mix right
after nuclear and hydro. Similarly, French hydro output has remained closer to the multi-year highs seen last year. Such
sharp corrections in the balances have undermined market psychology, especially since there is no sight of colder
weather on the horizon, at least for the upcoming 10 days.
Western Grid Market Forecast
The ridge of high pressure that had been blocking precipitation from reaching the West Coast has broken down this week,
but it will take sustained wet weather to offset dry conditions for the water year to date. In the Columbia basin, April
to September runoff at The Dalles is projected to be 82% of average, while California is headed for its lowest runoff
since 1977. Even so, without help from a hotter-than-normal summer, continued slow load growth and rising renewable
capacity (particularly Southwest solar generation) will limit incremental gas-fired generation and keep implied gas heat
rates in check.
Egypt Makes Progress on Independent Gas Imports
Egypt will allow companies to import gas using the government's network, the Petroleum Minister Sherif Ismail said late
last week in a move that could help address energy shortages that limit their production. Energy-intensive cement and
steel companies in Egypt have been forced to cut output in recent years during periods of peak use by everyday consumers
in the country of 85 million.
Supply Disruptions and Flat Iron Ore Demand from China Weaken Outlook for Freight Rates in 1H14
As expected, the Cape market tumbled last month. The four-route Cape tripcharter average lost 70% of its value in
January on news that the ban of Drummond’s Colombian coal exports was to be reinstated, which also created an influx of
Capes bringing coal from South Africa. There is still little sign of a recovery in demand from the Chinese steel market
where production is flat-lining, and despite the normal Q1 iron ore supply disruptions, iron ore prices are well below
where they were last year. PIRA expects the 2014 Cape market to follow a similar pattern to last year, a weak first half
followed by a rally later in the year.
ENDS