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Canadian Imports Declined Through Heating Season

Erosion of the international natural gas trade continued into the 2009-2010 heating season with Canadian sales into the United States sliding steadily downhill. The best that can be said for pipeline exports is that the rate of decay slowed in December, the second month of the current contract year, which began Nov. 1.

Canadian shipments to the U.S. dropped by 5% to 308.6 Bcf in December from 324.3 Bcf in the same month of 2008, according to the latest trade data compiled by the National Energy Board (NEB). In November the volume flowing south across the international border shrank by 13% to 256.2 Bcf from 293.8 Bcf in the same month of 2008.

The volume slippage is blamed on a combination of abundant supplies in the U.S., deteriorating production north of the border due to drilling slumps and rising consumption by Alberta thermal oilsands extraction projects.

The value of the gas trade has also continued to deteriorate. Prices fetched by Canadian gas at the U.S. border averaged US$4.92/MMBtu in November and December, down by 24% from US$6.45/MMBtu during the first two months of the 2008-2009 international contract year. Pipeline export revenues were US$2.8 billion in November and December, down 30% from US$4 billion in the same months of 2008.

From the viewpoint of exporters, unfavorable exchange rate trends worsened the financial effects of the trading erosion. In Canadian loonies, the November-December border price decline was 34% down to C$4.84/gigajoule (GJ) from C$7.38/GJ in the same period of 2008. The revenue slippage was 40%, down to C$2.95 billion from C$4.93 billion.

While little noticed outside the gas industry, its participants increasingly see the negative effects of the rising value of the Canadian dollar -- or the slide of the U.S. currency, in the view from the import side of the market -- as turning out to be a durable and significant setback.

The scale of the financial reverse was pointed out to a Calgary conference held by the Canadian Energy Research Institute by analyst Paul Ziff, whose Ziff Energy Group consulting firm has been an industry fixture since the 1980s.

In 2002, when the loonie was worth US64 cents, a gas price of US$7.00/MMBtu translated into a Canadian value of C$9.50. In the current heating season exchange rate range of the loonie hovering around US94 cents, a gas price of US$7.00/MMBtu works out to be about C$7.40.

That is, the exchange-rate bonus has virtually evaporated in times of strong prices. Worse yet, the currency trend has amplified export revenue losses during the current prolonged soft spell on the gas market because the exchange rate setback happened at the same time as commodity prices fell.

The squeeze appears likely to become tighter, with the Canadian dollar lately rising into the range of US96-97 cents. The increase is largely attributed to the international currency market view of the loonie as a petrodollar thanks to high and rising Canadian oil production and exports.

Current market performance has prompted the most optimistic Calgary price forecaster, FirstEnergy Capital Corp., to eat crow. "With natural gas prices having been caught in a serious downdraft in the past two months, we are faced with the growing likelihood that our bullish natural gas call for 2010 is facing a sharp downward revision," the investment firm said in a research note.

FirstEnergy admitted that it was wrong by about US$1.00/MMBtu with a previous forecast of a first-quarter average gas price of US$6.25, and that will affect expectations for all of 2010. But the firm continues to insist that the market is underestimating production losses due to the current drilling slump, meaning that storage will be harder to refill than expected following the heating season and prices will eventually firm as a result of emerging "structural undersupply."

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