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NEB Sees $5/MMBtu Henry Hub Gas by September, Winter Rebound

Canada's National Energy Board (NEB) released its summer energy outlook Thursday, predicting that high natural gas storage levels would lead to a drop in Henry Hub natural gas prices to about $5/MMBtu by September, but the agency also said it expects gas prices to rebound during the winter because of a continuing tight supply-demand balance. Electricity supplies are expected to be adequate in most of the Canadian provinces with the possible exception of Ontario.

"The current challenges and opportunities in this volatile energy market show us there is an increasing need to provide Canadians with information," said NEB Chairman Ken Vollman in a presentation to analysts and the media. "We are anticipating oil prices to remain high, natural gas prices to drop during the summer and then increase again in the winter. Electricity supplies are expected to be adequate this summer with the exception of tight markets in Ontario if unusually hot weather persists."

The agency noted that Canadian power systems typically peak in the winter rather than the summer so summer supply usually isn't a problem. However, that's not the case in Ontario where electricity peaks in the summer. "If Environment Canada is correct and warmer than normal weather is experienced for an extended period of time, Ontario could experience a very tight market similar to what happened last summer," the NEB said. "However, the province has added over 600 MW of new generation over the last year and more generation is coming on line. In addition, transmission capacity into the Greater Toronto Area has been improved."

The surplus gas storage situation across North America almost certainly will lead to lower gas prices this summer. The NEB noted that natural gas storage levels in North America are about 25% higher than levels at the same time last year and significantly above the five-year average.

"If storage continues to fill at expected rates, the gas industry will have to either find new markets for a significant amount of gas or shut in some production later this summer," the agency said, echoing comments made by its U.S. counterpart recently (see NGI, May 22). "A potential shut in would mean lower production revenues and reduced government royalties."

Nevertheless, the NEB noted that weather is a "large factor in gas pricing and an unusually hot summer or a rough hurricane season could stop the decline in prices." And regardless of the current storage surplus, by winter natural gas "will be back into a tight supply-demand situation and prices will rise as a result. Nymex futures prices for November are over $8 U.S. Consumers can likely expect continuing price volatility through the winter."

Canadian gas production currently is about 1% higher than it was in 2005, but U.S. production is down about 2% due to Gulf of Mexico shut-ins from hurricane damaged infrastructure, the agency said. "With the drop in natural gas prices expected to be temporary, producers will likely maintain high drilling activity despite a decline in price margins."

LNG imports into North America are anticipated to be higher this summer as facilities in Trinidad, Nigeria and Egypt have been expanded. "Europe tends to pull less supply away from North America in summer compared to winter due to lower demand and a lack of storage space." That should put further downward pressure on the price of gas in North America.

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