IN THE NEWS / Warm Season Hurts Natural Gas Prices
Down 50% In A Month: Bulging Storage Levels Weigh Heavily On Market
Ian McKinnon
Financial Post
Warm weather and bulging storage levels have kicked the prop out from under the price of natural gas, with Canadian prices plunging as much as 50% in the past month.
But the forward contract market indicates the bulls are still on the loose because longer-term fundamentals remain positive.
The dichotomy is helping create sharp price changes, something not likely to disappear soon.
"Volatility is here to stay, there's no doubt about it," said Jim Oosterbaan, vice-president of gas services for Ziff Energy, a Calgary based consulting firm.
While winter does not officially begin until Dec. 21, it begins on Nov. 1 in the gas business and runs until March 31. The amount of gas withdrawn from underground storage tanks in Canada and the U.S. in these months is crucial to price dynamics. Marketers generally want to sell their stored gas by the end of March and then rebuild supplies in the rest of the year.
Temperatures of up to 10C above normal across most of North America have resulted in storage volumes, which were at near record levels in November, dragging down prices. That has been evident at Alberta Energy Co.'s AECO C-hub in southern Alberta -- a major pricing point for Canadian gas. Prices fell in 50¢-chunks late last week before staging a rebound yesterday to about $2.20 a gigajoule.
David Wilson, vice-president of structured product at TransCanada Energy Ltd., said prices fell harder in Canada than on the New York Mercantile Exchange because expectations were higher and have not retreated as quickly as in the U.S. He said the slide means the January-March strip fetches $2.45 a gigajoule, down from its high near $3.
Long-term fundamentals of increasing demand and pipeline access to U.S. markets are still bullish for the industry and are reflected in the price for the next gas marketing year, now hovering at $2.50 a gigajoule, down from $2.60.
The volatility of the past few days shows the industry has not fully matured, said Mike Broadfoot, senior Canadian vice-president for Engage Energy. It is putting pressure on producers to manage their risk on price fluctuations.
"Managing the commodity is becoming more important. My belief is the volatility of prices in the next three or four years will outstrip other things producers work hard to control," he said.
When the continental gas market is fully mature, the price difference between North American supply basins and the benchmark Nymex futures contract will be based on the cost of transportation, Mr. Broadfootn said. The difference between Alberta gas and the Nymex will fall below the transportation costs, said Mr. Oosterbaan.
Producers constrained by low oil prices will be unable to meet all commitments, leaving excess pipeline capacity that will create transportation rate discounts and shrink the "basis differential."
Gas prices in the late summer and falls swung out of balance with basic fundamentals, said Mr. Oosterbaan. Despite low oil prices and a resurgence in nuclear plants slowing the growth of the gas-fired power market, he said Ziff is still optimistic about the future off gas.
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