While Canada's National Energy Board (NEB) sees continuing low prices for the rest of the summer until the heating season arrives, the Calgary office of Raymond James & Associates has a more brutal assessment involving full storage in the U.S. a full month before the peak season starts.
The investment house predicts that unless weather patterns change or there are major production shut-ins, U.S. storage, in particular, will set a record by the third week in September and be completely full with 3.75 Tcf of gas on hand by the start of October.
The supply outlook suggests that prices are poised to take a dive. "We expect there will be major shut-ins. Indeed there have to be one way or another," the Raymond James analysis says. "The relevant question is: What gas price will encourage producers to shut in sufficient gas to avoid hitting the storage wall so early? Our belief is that the September and October delivery contracts will need to move considerably lower to encourage this result."
Storage facilities across Canada as well as the United States held a total inventory of 3.371 Tcf by mid-July -- 513 Bcf or 18% more than the five-year average of 2.858 Bcf, the NEB calculates in a market conditions review.
The NEB also notes "high production, low demand and quickly filling storage all suggest prices over the next two months below levels in previous years. Inventories are quite high and could potentially test the limits of storage capacity at the end of the injection season in November."
While visions of an economic recovery periodically light fires under Canadian and U.S. stock exchanges, the NEB suggests that real activity including gas consumption will be slow to revive. "North American gas demand will likely be relatively low for the next several months, giving little support to prices," the board says. "The industrial sector is unlikely to provide any substantial increases in gas demand in the coming months."
The board pins some hopes on power generation to make a start on reviving gas demand, but is far from sure that a significant or lasting trend is beginning.
"Natural gas for power generation is likely to be the main consumer of at least some of the excess gas as some coal-fired generation is replaced by output from natural gas-fired units because of lower gas prices," the NEB says. "The continuation of this trend over the summer seems probable, although factors like overall electric power demand, weather and coal prices will determine the extent to which this substitution will take place."
The NEB holds out hope for the industry that prices will start to firm in the fall as heating season arrives and production drops as a result of the 50% drop in drilling across Canada and the U.S. this year.
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