IN THE NEWS / Cold not enough to alter producers' bottom line Gas
storage levels high
Ian McKinnon - Financial Post, with files from Bloomberg News
Frigid temperatures across much of the United States and Canada have lit a fire under natural gas prices, but the bottom line of many Canadian energy producers will not be affected much because of hedging and the high amounts of gas in storage.
On the New York Mercantile Exchange Monday, natural gas for February delivery rose 12.6¢, or 6.5%, to $2.071 (US) per million British thermal units (mmBtu), after rising 3.6% on Dec. 31 to $1.95 (US). The surge in the benchmark North American gas contract on the final day of 1998 was sparked by cold weather causing the largest drop in gas storage levels in more than two years. The American Gas Association estimated gas stockpiled in caverns and reservoirs dropped 167 billion cubic feet, almost 6%, in the week ended Dec. 25.
After seven straight sinking sessions, the upwards trend was established on Dec. 30, when the February contract jumped 10.5¢ (US) to $1.89l (US) per mmBtu following cold weather forecasts.
Spot prices in Alberta also strengthened. Spot traded at the major provincial hub in the range of $2.50 (Cdn) per gigajoule, a considerable recovery from lows of around $1.10 in early December. The Toronto Stock Exchange oil & gas subindex rose 2.46%.
While the rise started the new year on a good note, gas traders and producers aren't breaking out the champagne. The amount of gas in U.S. storage facilities is still 29% above year-ago levels, or 633 bcf higher. This means an extra 6.6 bcf available to buyers will weigh on the market until the end of March, the traditional end of winter in the gas business. "We're still well above 1994-95 levels, so I think it's going to take at least a month to work this surplus off," said Tom Pena, analyst with ED&F Man Inc. in New York.
Inventories need to drop more than 200 bcf per week through the end of January to dwindle to typical seasonal levels, he said.
Kenk VanderSchee, senior gas analyst with Energy Era Corp. in Calgary, agreed that a few days of shovelling snow and plugging in vehicle block heaters does not a winter make. Increased pipeline capacity has tightened the links between Canada and the United States, making the U.S. economy critical to gas prices north of the border. He said he is bearish about U.S. gas prices because of new supplies scheduled to flow from the Gulf of Mexico, a prime oil and gas producing basin, competition from cheap oil, and the impact of global recession on the U.S. economy.
A recent report by Peters & Co. Ltd. said the tardy appearance of winter caused af number of agencies and analysts to revise downward their expectations for U.S. gas prices. The Washington based Energy Information Administration now predicts an average wellhead price of $1.90 (US) per mcf in 1999, down from its previous figure of $2.10.
But the Calgary based investment boutique is sticking with its target of Canadian gas prices averaging $2.50 (Cdn) per mcf next year. The brokerage said it's too early to write off winter's impact on storage. Another factor is reduced capital spending by cash-poor producers, which are hobbled by low oil prices, high debt, and disinterested equity markets.
Influencing the bottom line of Calgary' players is the amount of hedging to secure high prices. One analyst estimated one-third of Canadian gas has been pre-sold at an average $2.50 per mcf. |
