Natural gas prices have been on a tear lately but investors are justifiably skittish that the strength is weather dependent and temporary. The next quarterly profit report for gas providers will be determined by current prices but longer term returns will rely on demand long after the unseasonably cold winter is over.
Futures markets – where producers and insiders place bets behind their best estimates on where the natural gas prices are going – suggest a rosy outlook for natural gas stocks for the remainder of the year.
Our chart this week compares the stock price for Encana Corp., Canada's largest natural gas producer, to the August, 2014, natural gas futures contract. Frigid weather will not be an issue for gas prices in August, clearly. But the $4.64 (U.S.) contract price does reflect the market's estimate on the potential effects of current low gas inventory levels when North American air conditioners are running full blast.
The harsh winter has sent U.S. natural gas inventories to lows last seen in March of 2004. Current inventory levels stand almost 50-per-cent lower than at this time last year and the lack of available supply should provide support for commodity prices until storage is replenished.
Encana stock has closely followed the rise in August natural gas. This suggests that Encana's recent strong performance is fully justified and will not fade with the change of seasons.
Natural gas prices have been depressed by oversupply for many years as the U.S. shale revolution accelerated. At the same time, gas has been touted as the energy source of the future because of its more environmentally friendly profile, particularly in comparison with coal which is still widely used in the United States for electricity generation.
It's still too early to call for the end of the natural gas price depression. Weather that we hope will never reoccur has played a significant role. In addition, Russia's foray into Ukraine has provided a recent and, we hope, temporary boost to gas prices. An enormous Gazprom pipeline runs through Ukraine carrying gas to developed Europe.
Nonetheless, the optimism reflected in the natural gas futures market is encouraging for a sector that has been down for a long time. The pipeline infrastructure to bring gas to more major U.S. urban centres is closer to completion and the outlook for Canadian natural gas producers is slowly, inexorably getting brighter.