Peyto Exploration & Development Corp T.PEY

Interesting Phenomenon Occurring

[TerribleEng]

Well, 

Looking at the lastest power burn data and trying to make sense of it. Every Natural Gas trading desk assumes that that higher natural gas prices will decrease usage as power plants swap to coal.

An interesting thing is occuring and I haven't seen an analyst price that in. 


While LNG is not a causal factor for marginal price determination directly (Limited export and margin goes to the buyer), it is playing a factor. Most models are accuractely showing coal substitution in Europe as utilities buy coal and leave what gas remains for commercial/residential heating decreasing demand for the given amount of HDD on the climate forecasts.

However, the coal buying has raised coal pricing (coal + Euro carbon offsets) to the same price as LNG; as it doesn't matter to a utility if they buy CO2 credits (difference between burning gas and coal) and use coal, versus buying LNG. Since coal does not require gasification facilities which are in short supply and there is surplus export loading capacity, this has forced a run on coal pricing in the US. With export clients signing supply deals to secure 2022 supplies since TTF and JKM pricing is known, global participants have no problem buying US Coal on contract to guarantee supplies.   

https://www.bloomberg.com/news/articles/2021-10-28/u-s-coal-miners-sold-out-for-2022-as-utility-demand-surges

While this won't cause NYMEX pricing to converge with LNG pricing, it is causing coal to gas switching in the US electricity market and higher gas power burn levels than would be dictated by the mild winter so far. The market right now should be in surplus, but we are at seasonal levels of draw and power burn is surprising to the upside. Coal right now is trading at the equivalent of $5/mmbtu gas. As long as pricing stays below that at regional hubs (NYMEX $4.50 or so), this phenomenon should exist for as long as European/Asians remain in dramatic shortage. At this point, it looks like March 2023 when LNG prices collapse back to historical ranges (~$10).

This is a temporary phenomenon, and when LNG prices decline, Coal will be in surplus putting pressure on US Gas pricing again. In the meantime, it should put a floor on US Gas pricing. Hopefully US Coal doesn't expand on this one time energy crunch, and US Gas doesn't expand to backfill the coal lost to exports. In the meantime, it should allow North American Energy players to get premium prices and deleverage.

[Ozhoks]

Thanks TE for your synthesis.  Maybe we can add lenders' attitude towards coal as well: https://www.reuters.com/markets/commodities/exclusive-hsbc-says-clients-must-have-plan-exit-coal-by-end-2023-2021-12-14/ "It's not good enough to have a policy on no new coal. We need to turn our attention to the urgent phase-out of coal alongside the scientific timelines."

[auagntungsten]

With the Media B$ , Finances, Covid, Weather embelishments......and Lying politicians How and what message are You wanting to send? I'd get behind the truths if they are ever told and allowed to be believed.