Nat Gas sees end of peak winter buying in US, fundamentals bearish in Europe: PIRA Energy

Ukrainian crisis or not, gas fundamentals are becoming more bearish by the day. The one-day rally on Ukraine may well be repeated in the weeks to come with additional one-day rallies, according to PIRA Energy

NYC-based PIRA Energy Group believes that peak winter buying has been wrapped up. In the U.S., Appalachian shale bottlenecks are increasingly visible. In Europe, gas fundamentals becoming more bearish. Specifically, PIRA’s analysis of natural gas market fundamentals has revealed the following:

Peak winter buying has been wrapped up
In Europe and Asia, peak winter buying has been wrapped up, with the recent Ukraine crisis having little impact. South American and Mideast counter-seasonal buyers are entering the scene, but it appears that in Brazil at least buying will not be as strong as last year.

Appalachian Shale bottlenecks increasingly visible
With rapidly increasing gas processing capacity set to unleash more production from the Utica Shale, existing pipeline takeaway options may prove insufficient given the growing needs of Marcellus producers. Diminishing remaining options to nearby markets have kept producers busy making financial commitments to underwrite projects that would gain access to other markets. The next major round of development is primarily aiming to reach markets in the Midwest and South — almost entirely via backhauls and/or flow reversals — as well as greater access to eastern Canada. Yet, this very large-scale future expansion of take-away capacity will not be ready until late 2015 / early 2016.

Gas fundamentals becoming more bearish
Ukrainian crisis or not, gas fundamentals are becoming more bearish by the day. The one-day rally on Ukraine may well be repeated in the weeks to come with additional one-day rallies, but it is clear to PIRA that no one wants Europe to be deprived of Russian gas flows on either side of this dispute. And when neither side benefits from a cut-off, it is exceedingly unlikely that one will occur. The goal here is not to ignore the significance of the Russia-Ukraine relationship on European gas markets, but to understand it in the commercial realities of the broader current supply/demand balances. The Ukrainian corridor for Russian gas exports is not as important as it used to be, but still plays a central role in European gas supply. PIRA's analysis of pipeline flows shows that Russia can divert a little over half of the gas it moves through Ukraine to locations all over Europe. A special feature published earlier this week on the ENG portion of the website details the pipeline flows at risk.

NYC-based PIRA Energy Group reports that large oversupply in electricity markets will further squeeze dark spreads. In the U.S., while the gas storage deficit continues to expand, and regional gas prices oscillate, the 12-month strip stands at $4.67/MMBtu. Specifically, PIRA’s analysis of electricity and coal market fundamentals has revealed the following:

Large oversupply in electricity markets will further squeeze dark spreads
2013 financial results being announced so far are illustrating the deep crisis of conventional generation across Europe. While lignite and coal are joining gas in no longer being immune from surges in renewable output, generators are also admitting that lower fossil fuel utilization is an irreversible trend. Considering that a solution to the large oversupply in the major European power market is not in sight, why are the German clean dark spreads not narrowing even further down to pre-Fukushima levels?

A stout storage withdrawal
An astoundingly stout withdrawal of 152 BCF was reported in today’s EIA update, a figure coming in at the highest end of a market range expecting a draw in the mid-to-high 130s. Besting both the year-ago (149 BCF) and the five-year average pull (105 BCF), the report stoked some bullish enthusiasm in the nearby NYMEX contract, which has otherwise been anemic at best of late. The April contract jumped by more than a dime on the news and managed to finish the session with a gain of ~12¢.

Headwinds abound for Global Thermal Coal pricing
Coal pricing was mixed last week, with prices for FOB Newcastle (Australia) and API#4 (South Africa) falling, while API#2 (Northwest Europe) rebounded somewhat. The strength in API#2 was likely largely due to the escalation of tensions in Ukraine and worries that Russian gas volumes to Europe would be curtailed. With South African coal supply returning to normal and Colombian exports headed that way in the next month; it will be hard for coal prices to appreciate rapidly.

Can commodity prices influence elections?

India is in the mood of parliamentary elections, and in less than 90 days, a new government will be in place in New Delhi. The Indian industry hopes that a new, stable government could perhaps help the country emerge from the current economic recession. People, as usual, are confused by electoral surveys and political predictions. But everyone agrees in unison that the new government needs to propel the country to a phase of economic resurgence.

One interesting national survey went largely unnoticed recently. The study conducted by the Centre for the Study of Developing Societies (CSDS) on behalf of Bharat Krishak Samaj says that farmers and rural Indians—the bulk of India’s vote bank—are really upset over the rising prices of essential commodities they consume and the low prices of the agricultural commodities they produce.

So, the moot question is, can commodity prices influence general elections in India? It looks that even though politics in India is divided over caste, creed, religion and communal passions and social divisions, a large number of voters will cast their vote on the impact the commodity prices had on their lives in the last five years.

The study--Report on the State of Indian Farmer--interviewed about 11,000 farmers in 274 villages of 137 districts across 18 states.

Here are some salient points from the survey:

**A significant number of farmers in India are ready to quit farming thanks to low returns from their produce. Given a chance, many of them are willing to migrate to urban areas for better living conditions. 47 per cent of those surveyed farmers said their condition is so bad that they prefer some work other than farming.

**About 70 per cent of the farmers surveyed said their crops got destroyed at least once in the past three years. About 58 per cent of them blamed both governments at the Centre and State for their problems.

** The survey, which also interviewed 4,298 women, found that 67 per cent of them felt that income from agriculture was not sufficient to fulfill the livelihood needs of their families. Of the 2,116 youth interviewed, only 20 per cent said they would continue farming.

**A large section of farmers – about 62 per cent – were not aware of the concept of minimum support price (MSP) for various crops that the governments keep declaring. This means the farmers are not really benefitting from government financial schemes to protect their agricultural produce from low prices.

**Most farmers said only rich farmers got the benefits of government schemes and policies, and only a tenth of poor and small farmers were found to have benefited from these schemes. Eighty-three per cent of the farmers had not heard about Foreign Direct Investment. Of them, 51 per cent said FDI should not be allowed since farmers may not be able to bargain.

**Most of those surveyed said price rise is going to be the most important poll issue in the 2014 Lok Sabha elections. They also said that unemployment and issues related to irrigation would also dominate the elections.

**Over half of those surveyed – 57 per cent – felt that no political party cared about farmers’ interests. About 16 per cent felt that the Bharatiya Janata Party (BJP) cared about farmers’ interest, while 13 per cent opted for Congress.

The survey on the eve of the parliamentary elections bares some truths. Majority of farmers have talked truth, because in the last few years farming has been an uneconomical activity thanks to volatile commodity prices and rising cost of production.

Prices of essential commodities like rice, dal, onion and vegetables have increased. But prices of several commodities that farmers produce have been caught in the vortex of volatility, low returns, bad weather and extreme environmental conditions.

70 per cent of Indians live in rural areas, but has any government at the State or the Centre cared to provide enough opportunities of financial inclusion, investment, technological know-how and irrigation facilities to the farming community in India?

If not, the state of commodity prices that has been affecting farmers and common man hard will considerably influence the electoral fortunes of several politicians and electoral candidates in the coming polls.