Analyst Says Higher Oil Prices, Less Gas from Canada Boost U.S. Gas Prices
Higher distillate prices resulting in less fuel switching is one driver boosting wholesale natural gas prices higher than might be expected, but another may be that the U.S. is no longer getting that extra slug of Canadian gas during extremely cold weather that it did in previous years, analyst Stephen Smith speculated.
"It's possible we're just not getting the help from Canada that we used to get, particularly in winter time," Smith said. "I'm speculating because there is no weekly data on Canadian imports, but the market appears to be reacting more strongly during weeks with lot of cold weather than it should just based on the cold or on the degree days. During the colder weeks we may be missing that extra supply."
Smith notes that in years past Canada had surplus production that it could send south to bolster supplies during the coldest weather. "This may no longer be the case. Our modeling work suggests the possibility that net Canadian exports may have contracted rather than expanded in the mid-December round of extreme cold weather and also for the week ending Jan. 16. If this is true, then the domestic demand expansion resulting from extreme cold wether could be amplified by the simultaneous contraction of net Canadian imports.
"The recent multi-week string of prices averaging $6 would normally be associated with extreme storage deficits," Smith said. "The current strength of oil prices explains only a part of this anomalously strong gas price behavior."
The higher oil prices definitely are pressuring those who could switch to stick with gas. In his weekly report, Smith notes that Henry Hub prices have been tracking an average of 32 cents/MMBtu below No. 2 oil on the Gulf Coast for the last five weeks. He compares that to the period of demand destruction last summer when Henry Hub prices tracked about 71 cents/MMBtu above Gulf Coast distillate for the five weeks ending in mid-June. "This is clear evidence as to why the current round of demand destruction pales when compared to the May/June 2003 episode.
"One moral of this story: if cold weather is the driver of gas prices, it will often drive distillate prices higher as well -- and for many users -- this spread is more critical than the absolute price level."
Also, ethane/propane prices have stayed slightly above gas for the last four weeks, Smith pointed out, prompting producers to extract the liquids from the gas stream and sell them separately rather than leaving them in to collect for more MMBtus.
Smith estimates the Energy Information Administration will announce Thursday that storage withdrawals were 197 Bcf last week. This would be 47 Bcf more than the normal seasonal draw and would mean the seasonal storage surplus relative to average 1994-1998 norms would drop from 310 Bcf to 263 Bcf.
"It would take about six more weeks as cold as last week (relative to normal) to eliminate this surplus by early March," Smith said, but he's making no weather predictions. "The nation was about 6% colder than normal last week and this week could be colder than that. Some forecasters are saying the next two to three weeks will be cold as well."
More information on Stephen Smith Energy Associates is available at http://www.stephensmithenergy.com.
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