NYC-based PIRA Energy Group reports that October crude prices traded within a narrow range. In the U.S., total commercial stocks drew again this week. In Japan, crude runs eased again while crude imports and stocks surged. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

October crude prices traded within a narrow range, with bullish sentiment related to declining domestic production offset by a bearish 20+ million barrel U.S. crude stock build associated with seasonal refinery maintenance. The majority of that stock build occurred in PADD III, resulting in weaker crude differentials in both West Texas and the Gulf Coast, relative to Cushing, where crude stocks were unchanged. Meanwhile, Bakken and Canadian light grades strengthened on the imminent start-up of two new northern pipelines.

Upside Production Surprise Before Abrupt Ongoing Downturn

Last Thursday's storage injection brings total inventories to 3,929 BCF assuring a new end-October record high. Updated balances now point to a 3.98-4.00 TCF weekly peak for the season with a daily foray above 4.0 TCF still in the cards. The inability to post an even higher peak underscores the extent to which supply and demand responses were needed to limit builds given feasible storage limits, namely within the Producing Region (PR), where stocks are projected to peak a bit above 1.4 TCF by mid-November. Such a level would be ~94% of demonstrated capacity — a figure that also highlights the need of incremental demand and the additional pullback in production of late needed to keep storage in check.

As Marginal Costs for Coal Units Hold Up, German Power Sets to Remain Firm

This week will see wind output rise well above normal levels, bringing German day-ahead prices down with them. There are, however, some structural factors that will continue to underpin German prices. While EUAs remain at multi-year highs, marginal costs for coal units are also relatively stronger than anticipated. In fact, critically low water levels in key stations along the Rhine River imply higher delivery costs by at least 0.8 to 2 euro/MWh. Power generators have announced possible disruptions, especially as water levels are moving further lower.

Brief Bullish Run Tamped Down, Market Returns to Downward Trajectory

The modest coal rally that occurred in late October into early November came to an end last week, with the entirety of the three major forward curves falling compared to the end of the previous week. FOB Newcastle (Australia) generally lost the most ground, while API#2 (Northwest Europe) and API#4 (South Africa) also fell, but to a lesser extent. API#5 prices (higher ash, lower cv FOB Newcastle coal) fell sharply to a new low for the year. This is a reflection of how weak buying activity, particularly from China, is in the current market. With underlying Chinese coal demand and thermal coal imports continuing to contract year-on-year, it will be very difficult for prices to structurally rise.

Interest in California Offsets Prior to Compliance

PIRA expects a continued slow escalation in carbon price — with upward pressure from the increasing reserve price will be muted somewhat by bearish emissions data, weak inflation figures (impacting reserve price), and compliance offset usage. November has seen the milestone Compliance Period 1 surrender and will see the final auction of 2015. Interest in offsets drove prices higher and narrowed the spread vs. allowances.

European LPG Prices Mixed

Large cargo butane import prices were crushed 9% lower to be called below $360/MT, as low Rhine River levels are stifling barge traffic to Germany. Although higher prices persist up the river, halted barge traffic has disconnected inland markets and the Amsterdam/Rotterdam/Antwerp cargo market. Propane prices gained $11/MT to $367/MT for December futures — a level that has the arbitrage from the United States wide open.

Ethanol Prices Higher

U.S. ethanol prices increased the week ending October 30. Assessments were supported by higher gasoline and corn values.

Dollar Pressure

With commodity indices struggling to maintain multi-year lows, and farmers extremely undersold on 2015 production, it’s hard to find much to be bullish about.

Strong U.S. Labor Market Report Significantly Raises Odds of December Fed Tightening

Last week’s better-than-expected U.S. data for October removed worries about the economy’s momentum. They also suggested that the country’s labor market is increasingly running out of slack. There were signs of faster wage growth, but they remained tentative. The relationship between unemployment and wage inflation is likely to be a key concern for U.S. policymakers going forward. Asian manufacturing confidence data for October showed encouraging improvements.

U.S. Commercial Stocks Draw Again

Total commercial stocks drew this week, the second draw in a row. A drop in crude and product imports seems to be the primary driver. Total commercial stocks are down 6.0 million barrels from the all-time high. With larger draws the same few weeks last year, the commercial stock excess. Crude stocks built and the surplus widened to the highest of the year. With crude runs still low due to maintenance, this is not an unexpected outcome.

U.K. Gas Enters the Switching Band with Coal, but Effect Limited at this Point

The slide in NBP prices is leading gas to a more competitive position relative to coal. At current market prices, PIRA will be upgrading the utilization of U.K. gas-fired generation by roughly 1 GW through the end of the year and about 2 GWs in 1Q 2016.

U.S. Coal Market Forecast

Warm weather (actual and balance of month) is depressing natural gas prices and inflating coal stock levels, stirring memories of 2012. The downside price risks for gas and coal, which we warned about the past few months, have already arrived. More supply-side destruction in fossil fuel markets is expected.

WCI Carbon Market to Carry Surplus Forward, 2015 With Record Expected Length

Newly released California and Quebec GHG emissions data, through 2014, contained few surprises. The Compliance Period 1 allowance surplus is at least 35 MT, not accounting for use of offsets. Should 2014 CA broad scope emissions levels persist for 2015, the surplus would be about 35 MT for that year alone. CCA prices were not affected by the release.

Key Ethanol Industry Indicators Reverse

The week ending October 30, U.S. ethanol and production and stocks rose and the manufacture of ethanol-blended gasoline fell.

Key Indicators Continue to Gain

The S&P 500 posted a fifth week of gains. Most of the related indicators improved again (Russell 2000, volatility, and U.S. high yield credit). Emerging market bond credit performance has been flat the last several weeks, while the U.S. indicators have continued to improve. Overall, commodities eased again, as did ex-energy. Oil was slightly higher. With regard to currencies, the U.S. dollar was mostly stronger, most notably against the euro, yen, British pound, and key eastern European currencies. U.S. government bond yields have inched higher on short and longer-term maturities as markets continue to contemplate the Fed raising short-term rates at its next meeting, which will conclude December 16th.

Japanese Crude Runs Ease Again, Crude Imports and Crude Stocks Surge

Crude runs eased again and crude imports rose sharply from very low levels such that crude stocks ballooned 7.9 MMBbls. Finished product stocks posted a draw, though kerosene continued to build seasonally and there was a minor build in gasoline. Margins remain good and strengthened on the week due to higher cracks on all the major products.

Ukraine Receiving Gas Cheaper from Western Europe Despite Deal to Lower Russian Price

The price of natural gas (delivered to Ukraine) from the European Union under some contracts with national joint-stock company Naftogaz Ukrainy has fallen to the level that is lower than the price of Russia’s Gazprom, Business Development Director at Naftogaz Yuriy Vitrenko has stated. “Last week we’ve signed an agreement at the price lower than Gazprom’s [price]. This week we’ve also bought at a price lower than Gazprom’s [price],” he said.

CSAPR Emissions Below Cap — Awaiting New Regs

Emissions data for the Cross State Air Pollution Rule are complete through Q3 2015 (including the Ozone Season) and show significant year-on-year emissions decreases, with all programs set to finish 2015 at or below even tighter Phase II caps. The Seasonal NOx market awaits the new federal Transport Rule for 2008 Ozone NAAQS; it is unclear whether current allowances will be recognized. EPA must also address certain states’ budgets/caps, while a decision is soon expected from the D.C. Circuit on MATS.

Global Equities Gain on the Week

Global equities gained on the week. In the U.S., growth sectors led the complex higher. Banking and energy well outperformed and posted strong gains. Defensive sectors underperformed as evidenced by declines in consumer staples and utilities. Internationally, many of the tracking indices were higher, led by a strong gain for China.

Petrobras Oil Workers Strike — A Step Toward a More Politicized Movement

The Petrobras oil workers' strike has spread to producing fields in the Campos Basin, which account for 65% of Brazil’s crude oil output. Oil production losses on Monday and Tuesday averaged 226 MB/D and reportedly increased on Wednesday. The company is trying to reduce the damage to production by sending contingency teams to the affected platforms. The downstream impact of the strike is likely to be limited since, by law, refining operations must meet a minimum requirement in order to avoid serious disruptions of supply. Unlike most previous labor actions, which focused on wages and have ended with typically little impact, the unions this time are demanding a say in management business decisions. PIRA’s best guess is that the strike does not last more than two weeks. Production losses will mostly impact exports, but not initially because ample stocks can be drawn down, but inevitably they will be lower than they would have been because of the output losses.

Poor Showing in China LNG Will Remove Support for Asia Spot

The illusion of spot price support in Asia is bound to be short lived if only for a severe slowdown in China, which has subscribed to a large portion of the new regional LNG supplies on offer.

Aramco Pricing Adjustments for December: Europe More Generous, Asia Tightened

Saudi Arabia's formula prices for December were just released. The most significant change was more generous terms for European destinations, with Northwest Europe being cut more aggressively than the MED. U.S. pricing was lowered by a modest amount, while Asian pricing was raised. The adjustments, in a broad sense, were in line with what fundamental pricing drivers would have suggested.

Keystone XL Pipeline Rejected

On Friday, U.S. President Obama formally rejected TransCanada’s application to build an oil pipeline from Alberta to Steele City, Nebraska, where it would connect with the existing Keystone pipeline system, increasing its capacity by 830 MB/D. This was a political decision and the President made it clear that fighting climate change is a priority for his remaining 14 months in office. In the near term, this decision will not have much impact on Canadian price differentials. However, by the end of this decade, new capacity will be needed to avoid steeper discounts for Canadian grades.

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.

History repeats itself. In January 1959 the first LNG vessel shipped out from Lake Charles, Louisiana to deliver its trial cargo to Europe. Soon, another important LNG shipment is going to leave the Gulf of Mexico. This time, the destination is Lithuania – one of the first deliveries from Cheniere’s Sabine Pass LNG export terminal will be sent to Port of Klaipėda in January 2016.

Driven by significantly higher natural gas prices compared within Western-Europe, Lithuania took the decision to reduce dependence on Russia by building an LNG import terminal. The project was executed within three years and the Independence FSRU (Floating Storage and Regasification Unit) started operations in December 2014. If planned gas infrastructure developments are delivered in the future, Lithuania will be able to cover domestic natural gas demand from LNG and even export gas to its neighbors. As a result, Gazprom has offered a gas price discount of almost 20% to the country.

Other Central-Eastern European countries are seeking to diversify their gas import sources through LNG. After a two-year project delay, the Polish LNG terminal is scheduled to start its commercial operation in May 2016. The Croatian Government has also announced the construction of an LNG import terminal as a strategic investment project which has recently received the location permit on Krk Island. If Hrvatska LNG passes the final investment decision next year, the plant could be commissioned in 2019.

Currently, 26 LNG import terminals are in operation in the EU-28 countries, with annual regasification capacity of 195bcm. An additional 23bcm/y of capacity is currently under construction with 13bcm/y expected to come online this year with the start of the Dunkerque LNG Terminal in France. Total European LNG import capacity already exceeds recent Russian exports volumes. With extensive LNG export infrastructure developments in North America and Australia, and slowing gas demand growth in China and Japan, more LNG is anticipated to be available to European gas markets, potentially reshaping the continent’s natural gas landscape significantly.

NYC-based PIRA Energy Group reports that Brent crude prices staged a modest recovery from late August through mid-October, but then prices ran into strong headwinds. In the U.S., commercial oil inventories fell this past week. In Japan, crude stocks posted a strong draw. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices staged a modest recovery from late August through mid-October, but then prices ran into strong headwinds. However, the price increase of over $2/Bbl on October 28 could be an early taste of a rally that PIRA expects once the January contract is the front-month price and December inventory declines become evident. Refinery margins will hold up better than generally expected.

More Intensive Price Weakness at Henry Hub Overshadows Broader Market Weakness

The broader market downturn has gathered momentum despite many prices decoupling from Henry Hub in late October. While the dust has not settled, all upstream markers are now floundering near the $2 mark, closing this year’s longstanding gap between Dominion South and Westcoast St. 2 prices. The stepped-up assault against HH due to storage congestion in the Producing Region will end sooner rather than later, specifically when withdrawals commence. However, that is not likely until mid-November, and the timing and sustainability of a price recovery is murky given bearish weather risks.

Exports/Renewables Push Germany Up; France Bearish

PIRA’s price forecasts for Germany have been moved up on the back of a less bearish demand outlook, resilient exports, and a downgraded renewable generation outlook. The timing of the lignite stand-by reserve is slightly more bullish than expected, but the interaction between this stand-by reserve and market prices will depend on details of the dispatching. However, hedging of these units is no longer needed, which is bullish for the back of the forward curve.

Asian LPG Prices Push Higher

Asian LPG prices jumped higher on stronger crude and as speculators expected Saudi contract prices for November to increase by as much as $40/MT from current levels. The propane FEI gained 7.8% to $471 by Friday’s settle. Butane gained to widen its premium over propane to over $20/MT. With both LPG components trading at a premium to naphtha, the feedstock is priced out of petrochemical usage.

Near-Term Coal Pricing Outlook Remains Soft; 4Q16 Pricing Turns Somewhat Bullish

Despite some strengthening currencies vs. USD, Pacific Basin physical prices moved slightly lower in October due to a weaker oil market, Chinese coal pricing cuts, and insufficient supply discipline from Australia. With no clear evidence that China’s thermal coal imports will soon stabilize, PIRA maintains a bearish outlook for the Pacific Basin. Atlantic Basin prices moved somewhat higher in October, with stronger European coal burn giving CIF ARA (Northwest Europe) and FOB Richards Bay (South Africa) prices a boost. Similar to the Pacific, we have lowered our previously bearish forecast again, although we are now above forward for 4Q16.

Ethanol Prices Exhibited a “V-shaped” Pattern in October

U.S ethanol prices fell early in the month, but they rebounded during the second half as the market tightened. D6 RIN prices soared.

Wheat Shorts Cover

Friday’s Commitment of Traders report confirmed one worst kept secret in the markets while the heavily-watched wheat short declined enough to give the Chicago market a bit of a breather, though Kansas City saw the addition of more shorts.

Climate Policy in Flux in Canada

The victorious Liberals had the least specific climate platform and we do not expect changes to Canada’s GHG targets for global negotiations. Provincial premiers will join the talks. A broader climate policy discussion will follow. Ontario and Quebec announced aggressive 2030 goals, and Ontario continues planning for a carbon market link with California and Quebec. Alberta’s new government tightened the large emitter carbon program, impacting oil sector and pressuring coal. British Columbia began working to limit carbon intensity of LNG.

Canadian Elections: Liberal Victory Does Not Materially Change Oil Pipeline Outlook

The surprisingly decisive majority win of the centrist Liberal Party in Canada’s October 19 federal election does not materially change PIRA’s long-term outlook on new Canadian oil pipelines. PIRA still believes that at least one new Canadian pipeline project will come online at some point after 2020. This is in line with our view that crude price weakness and a slowdown in western Canadian production growth have delayed the urgency for new pipeline capacity until post-2020. That said, the Liberals’ support for a carbon price and promise to strengthen the environmental review process for oil projects have the potential to increase costs or contribute to delays for the oil industry.

Global Equities Slightly Lower

Overall global equities were down slightly on the week, though the U.S. S&P 500 gained a bit. For the U.S., retail and consumer discretionary were the best performers. Energy was little changed. Internationally, all the tracking indices lost ground with emerging markets, emerging Asia, and BRICs putting in the worst performances. With regard to individual markets, Argentina did the best for the week, posting a nearly 10% gain, and holds a 33% year-to-date gain, in dollar terms.

Asia-Pacific Oil Market Forecast

High stocks, both crude and product, along with October crude stock building because of refinery maintenance were enough to force prices to retrace earlier gains. Another short-term negative for price is the desire by some companies to reduce inventories for end-year accounting purposes (LIFO). Longer term, the market will increasingly need additional barrels, even after accounting for the return of Iranian barrels in spring 2016. By 2Q16, the market will have to begin signaling that more oil will be required and prices should begin a more sustained recovery.

Strong Supply Undermines Focus on Improving Demand

Buyers of Russian contract gas are not wasting any time in pursuing the minimum annual total even if they believe that oil-indexed prices will move lower. With LNG supply building on the water, pressure on spot prices will increase over the Gas Year and contract gas buyers want to be in a flexible place to take advantage of the price weakness.

Western Grid Market Forecast

Compared with September, spot on-peak power prices were down across the board in October, led by a $3/MWh drop at Mid-Columbia. Palo Verde prices fell by ~$2/MWh and the California hubs saw only slight declines. Warmer than normal weather and generation/transmission maintenance lent support to California electricity prices. Changes to the forecast include downward revisions to gas prices through the first half of 2016 and a lower hydro generation forecast based on early runoff projections. As a result, we remain bullish on Mid-Columbia heat rates through 1Q16. Southwest implied gas heat rates should also benefit from lower gas prices, with CCGTs again displacing higher cost coal units in the Southwest. However, all markets look weak during 3Q barring sustained hotter than normal conditions.

Dry Bulk Freight Market Struggles to Find Upward Momentum

Cape freight rates weakened during October with the 5TC average falling from just under $15,000/day to close to $9,000/day. Bunker fuel prices remain low, providing little support for rates. Australian iron ore exports dipped slightly month-on-month from strong September levels, with Brazilian iron ore loadings showing a similar trend. New Cape deliveries have started to outstrip Cape demolition, leading to a return to Cape fleet expansion. PIRA has taken a more bearish outlook for Cape freight rates through 2016, largely due to a notable drop in Cape port delays and low bunker prices capping rate increases.

U.S. Ethanol Demand Up; Stocks and Production Decline

U.S. ethanol-blended gasoline manufacture has risen for three consecutive weeks, reaching a near-record 9,162 MB/D the week ending October 23. Ethanol inventories declined by 599 thousand barrels to 18.3 million barrels, the lowest level of the year.

Constructive Tone of Economic Data Is Resulting in Improved Market Sentiments

The mood in global financial markets brightened considerably during October, as major market indices climbed back to levels last seen in mid-August. Recent dovish actions by developed world central banks likely played a role in boosting market confidence. But encouraging data from developed and emerging economies were much more important influences in all likelihood. This report also discusses U.S. GDP and other recently released third quarter data.

U.S. Commercial Stocks Draw

For the first time in several weeks, overall U.S. commercial oil inventories fell this past week. Strong reported demand, up 830 MB/D on the week, at the same time as refinery operations are still being impacted by large scale plant maintenance, caused product stocks to decline. The crude stock build moderated as runs increased and crude imports declined. The year-on-year stock surplus still managed to increase almost 5 million barrels to 170 million barrels as this week last year had an even larger stock decline.

Production Anemic, Demand Strong Implies More Upside Risk to U.S. Exports

Year-on-year net shipments of U.S gas into Mexico remains stout. For October, exports are projected to average ~2.9 BCF/D, a whopping gain of ~0.9 BCF/D year-on-year. Growth is being driven by both rising demand and dwindling supply. Notably, domestic natural gas production is running ~0.5 BCF/D lower year-on-year, a development that will likely persist as PEMEX budgets remain constrained and gas rig counts remain at record lows. But higher demand reflects a trend with staying power as new gas EG capacity and industrial projects come online. PIRA’s Reference Case exports to Mexico appear increasingly subject to upside risks if new pipeline interconnectivity comes online next year in a timely fashion.

Biofuels Programs Move Forward in Over 60 Countries

The market for ethanol in China has opened up. The country plans to resume building corn-based ethanol plants after a decade-long ban.

S&P 500 Continues to Gain

The S&P 500 posted a fourth week of gains. Also, all of the related indicators improved again (Russell 2000, volatility, high yield credit and emerging market credit). Overall, commodities eased, as did ex-energy. Oil was also lower. Palladium, which had posted six straight weeks of gains, was modestly lower for the third straight week, while aluminum fell again. With regard to currencies, the U.S. dollar was mostly stronger, most notably against the euro and key eastern European currencies.

Japan Crude Runs Soon to Rise, Crude Stocks Post a Strong Draw

Crude runs eased again and should be reaching a seasonal bottom as turnarounds begin to wind down. Crude imports were very low and stocks drew 5.5 MMBbls. Finished product stocks built slightly due to higher naphtha and kerosene stocks. Product demand, while lower for the single week, has begun to rise on a trend basis. The indicative refining margin was modestly higher on the week as all the cracks other than gasoline improved.

Bangladesh Revises Gas Rates in Preparation for LNG

The government of Bangladesh decided to combine the rate for locally extracted natural gas with re-gasified imported LNG as recommended by a six-member expert committee. Meanwhile, the government is set to prepare the final draft in consultation with Excelerate Energy (EE) for installing the LNG terminal at Moheshkhali. As per the deal, the company will implement the project on build-own-operate-transfer (BOOT) basis to meet the growing demand of the gas and it would be transferred to the government after the 15 years.

Lower Refinery Maintenance, Higher Crude Runs Drive Expected November and December Crude Stock Draw

The latest view of the October U.S. crude balance indicates that monthly end-October crude stocks will set a new U.S. record, surpassing the previous April 2015 peak by 1.3 million barrels, to 485.1 million barrels. We believe that stock levels will fall quickly from that level, however, as refinery CDU outages rapidly decline and crude runs pick up. We also expect domestic crude supply — crude production plus balance item — will continue to erode, while crude net imports should be largely unchanged from October levels. For the first quarter of 2016, higher crude runs, lower domestic crude supply, and somewhat lower crude oil net imports result in a significantly lower stock builds, compared to the first quarter of 2015.

Henry Hub Free Fall in the Face of New U.S. Supplies Implies Weakness for NBP

Extremely strong gas exports out of Norway and Russia are playing a role in cooling off NBP prices, but it is more LNG supply that would accelerate a decline in November and December assuming normal weather. Confidence levels regarding the speedy availability of attractively priced Atlantic Basin cargos are justifiably high given weak demand in Asia, combined with an ongoing surge in supply there.

Slow Capital Formation Has Inhibited Oil Demand

The decline in oil prices has not led to the promised increase in GDP. In fact, labor productivity growth, the presumptive engine of increased GDP growth, has actually slowed in the developed countries. Slower labor productivity growth is attributable to slower rates of capital formation. Because oil and capital are complementary factors of production, oil demand growth has also been adversely affected. We believe that capital formation has been delayed. The factors that pull the economy out of recession are out of sequence. Instead of residential and non-residential fixed investment being the prime movers for GDP growth, as has been the case in past recoveries, the current recovery in the U.S. was led by the household sector. Expansionary monetary policy repaired household balance sheets, which led to increased household consumption. We believe that in the next two years there will be a substantial pick-up in business fixed investment. Following the Keynesian paradigm, this will be followed by a new bout of consumer spending. Both the increase in capital formation and the subsequent increase in consumer spending will lead to increased oil demand growth.

North American GHG Quarterly Update: Canada

The victorious Liberal party had the least specific climate platform of the three major parties in the election, and we do not expect changes to Canada’s GHG targets for the global UNFCCC climate negotiations. Provincial premiers will join the Paris talks, highlighting the new focus on provinces. A broader climate policy framework will be discussed after Paris, as additional policies will be needed for Canada to meet 2020 and 2030 targets. Ontario in May announced an aggressive 2030 emissions target of a 37% reduction vs. 1990; Quebec followed in September with a 2030 target of a 37.5% reduction. Both provinces will likely need to address the transport sector to meet targets. Ontario continues planning for a carbon market link with California and Quebec, with the program start as early as 2017. Alberta’s new NDP government has set up a Climate Change Advisory Panel to drive discussions and advise the Minister. Alberta also tightened its large emitter carbon program, with greater intensity reductions and higher compliance fees impacting the oil sector and pressuring coal generation. British Columbia began work on regulations designed to limit the carbon intensity of LNG projects.

U.S. August 2015 DOE Monthly Revisions

DOE released its final monthly August 2015 (PSM) U.S. oil supply/demand data last week. August 2015 demand came in at 19.81 MMB/D, which is 50 MB/D lower than what PIRA had carried in its monthly balances. Compared to the DOE weeklies, total demand was lowered 429 MB/D, largely a function of the 704 MB/D reduction in “other.” Distillate was revised higher by 201 MB/D and resid demand raised 82 MB/D. Total demand for August 2015 versus August 2014 grew 414 MB/D, or 2.1%, a slowdown from the 700 MB/D growth versus year-ago seen in June and July 2015. Kero-jet demand again outperformed the barrel average, higher by 4.9%, similar to what was seen in July. Distillate lagged the barrel average, up only 0.3%, while gasoline and “other” also underperformed slightly, but each still up about 1.7% versus year-ago.

North American Gas Forecast Monthly

For many months, PIRA has warned of an impending Producing Region (PR) “storage crisis” unfolding in the early stages of the heating season due to the capacity constraints and record high seasonal storage carries throughout the summer. With threadbare margin available to avoid extreme congestion and a related meltdown of Henry Hub (HH) prices, the past month’s mild weather, and more of the same expected for November have been more than the market could handle. Consequently, the past week’s HH cash price crash from the mid-$2.50s toward $2/MMBtu should not be perceived as an “out of the blue” shock.

October Weather: U.S. and Japan Warm, Europe Cold

October weather for the three major OECD markets turned out to be 3% colder than the 10-year normal and the resulting oil-heat demand effects were 64 MB/D above normal. On a 30-year-normal basis, the markets were 7% warmer.

Gas Flash Weekly

For some time, PIRA has emphasized downside Henry Hub (HH) prices risks as the heating season looms and available Producing Region storage capacity dwindles. The more than 40¢ plunge in the November contract in its last six days took it to its lowest level in more than three years. Together with this week’s acute weakness in the HH cash market, these issues have highlighted a transition of storage congestion from a near-term threat to a very real factor impacting both injections and HH prices.

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.