Canadian producers are braced for severe summer price lows -- possibly below C$2.00/MMBtu (US$1.80) -- as international traffic in natural gas continues to slow down on oversupplied markets.
Exports to the United States, a key indicator accounting for more than half of Canadian output, fell by 16.5% in the latest monthly trade report by the National Energy Board (NEB). Supply backlogs are piling up in storage facilities on both sides of the international boundary, say research notes by Calgary gas and oil investment houses Peters & Co. and FirstEnergy Capital Corp.
Heating season ended in a whimper as March pipeline deliveries to the U.S. slid down to 295.5 Bcf from 354.1 Bcf in the same month of 2008, the NEB reports.
Average prices fetched by Canadian gas at the border fell even more sharply. In U.S. dollars the drop was 55.4% to US$4.05/MMBtu from US$9.12 in March of 2008. Exchange rate movements softened the blow as measured in Canadian loonies, holding the slide back at 43.8% to C$4.79/GJ this March from C$8.51 a year earlier.
In U.S. funds, monthly Canadian gas export revenues fell 62.7% to US$1.2 billion this March from US$3.2 billion a year earlier. In loonies, the drop was 52.9% to C$1.5 billion from C$3.2 billion.
For the first five months of the current contract year ending Oct. 31, the NEB record shows an 11.9% drop in Canadian gas export volumes to 1.527 Tcf from 1.733 Tcf in the same period of 2007-08.
In U.S. funds average border prices in November through March were off by 29.3%, down to US$5.62/MMBtu from US$7.95 for the same period of 2007-08. Revenues dropped 37.4% to US$8.7 billion from US$13.8 billion. In Canadian money the price drop was 12.5% to C$6.47/GJ from C$7.39 and the revenue erosion was 22.5% down to C$10.7 billion from C$13.8 billion.
"The outlook for natural gas prices over the remainder of the year is grim, with sub-C$2.00/Mcf prices likely for periods of time over the summer," says the Peters investment house. There is "strong likelihood for production shut-ins of about 2 Bcf/d in Canada, with another 1-1.5 Bcf/d possible south of the border if U.S. gas storage cannot be taken up to 3.95 Tcf."
Mirroring the inventory logjam south of the border, Canadian gas storage is also filling up early in the injection season. FirstEnergy estimates that as of May 31 western Canadian gas warehouses were 78% full, brimming with 382.3 Bcf. "This is 81.5 Bcf ahead of the level one year ago and is 121.9 Bcf ahead of the five-year storage level."
FirstEnergy says its weekly estimates of Canadian exports suggest the erosion of the trade is slowing down but is waiting for clear signs of reviving movement before declaring the worst is over. "We expect that net exports and/or western gas storage movements will provide the first signs of any seasonal or non weather related increase in U.S. natural gas demand."
The Peters gas analysts voiced a Canadian consensus that the market trouble is temporary, and is largely a symptom of time lags between price drops and supply reductions. By this time next year results are due to start showing the sharp cuts in drilling and field development activity on both sides of the international border, the investment house suggests.
"The North American supply-demand situation should swing sharply back in favor of higher natural gas prices by the middle of 2010. We forecast that, even with a rebound in drilling activity to 1,450 total rigs in the U.S. and 16,000 wells in Canada, U.S. gas storage will decrease to 3.2 Bcf for the beginning of the 2010-2011 heating season."
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