European energy prices face weak spring

Fri Apr 4, 2014 7:38am EDT

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* Coal and German power prices might have reached floor

* British gas prices have further room to fall

* Demand for thermal power not seen improving significantly

By Nina Chestney and Vera Eckert

LONDON/FRANKFURT, April 4 (Reuters) - European benchmark power, natural gas and coal prices have dropped to multi-year lows and gas prices in particular could drop further in coming months given oversupply and weak demand.

European energy prices have fallen steadily this year as a result of a mild winter and a supply glut. A warmer-than-average outlook for the start of spring has put further pressure on prices this week.

In power markets, German prices for baseload (24 hours) delivery next year have fallen by more than 40 percent since a peak in 2011 and trade near 10-year lows, just below 34 euros per megawatt hour (MWh).

European coal futures are at four-year lows of $80 a tonne and British gas forwards have fallen below 50 pence per therm to two-and-a-half year lows.

"The strong euro weakened coal prices in Europe which have already been under pressure from low demand resulting from a warm winter," said Joerg Seide, head of power market analysis at Swedish utility Vattenfall's trading unit in Hamburg.

"Mild temperatures have resulted in gas storages being filled above normal levels at this time of the year. This drives gas prices down and limits power prices."

"In addition, exceptionally high power production by renewable energy sources in Q1 added to the low fossil-fired generation and created a bearish sentiment for the future," he added.

While low power and coal prices are triggering production cuts to maintain profitability, analysts say that gas prices still have room to fall before producers begin to worry about their profit margins.

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CHART-Energy index: link.reuters.com/syd38v

CHART-Dark & Spark Spreads: link.reuters.com/vyd38v

CHART-German power: link.reuters.com/xyd38v

CHART-UK gas: link.reuters.com/baf38v

CHART-API2 2015 coal: link.reuters.com/haf38v

CHART-Euro-dollar rate: link.reuters.com/daf38v

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DEMAND SLUMP

"At 45 pence you would start to see more fuel switching (to coal) and at 40p a fair amount. Prices could be pressurised downwards as demand for thermal power hasn't been growing," said Trevor Sikorski at consultancy Energy Aspects.

"At prices around 40 pence per therm you would see some support. Because of a mild winter and demand being down, gas in storage has ended the withdrawal season so high that it frees up a lot of additional gas and prices are falling to try and trigger some demand-side response," he added.

According to National Grid data, Britain's total gas demand in March was down 25 percent compared to the previous year, its largest fall since December 2011.

This was mostly due to the milder-than-average weather which has reduced demand for gas for heating and this is not expected to pick up significantly as summer approaches.

German power's decline has been due to lower fuel costs and a stronger euro, which increases margins for utilities as they sell electricity in euros and buy fuel, such as coal, in dollars.

The euro has risen almost 15 percent against the dollar in the past two years to its current price of $1.37.

Most analysts said that further price falls would trigger production cuts that would begin to support prices.

"At 33 to 34 euros, a certain price floor should have been reached unless carbon and coal prices fall significantly further. But the question is who will continue to generate more oversupply at these prices?" said analyst Konstantin Lenz of Berlin-based Lenz Energy.

European coal futures have fallen closely in line with German power prices, shedding almost 40 percent in value since 2011 to trade near five-year lows of around $80 a tonne.

Analysts said that there had been healthy production from exporters such as Australia, Colombia and South Africa.

But miners should begin to cut exports should prices fall much further, threatening miners' profitability.

"I don't see much more downside as there is not much incentive to sell at a lower price," one analyst with a major coal miner said.

Industry data shows that most Colombian coal could still be sold profitably at prices below $70 a tonne, but most Russian and South African sellers already struggle at current prices. (Additional reporting by Henning Gloystein in London; editing by Jason Neely)

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