Alberta natural gas prices, already under pressure after recent changes to pipeline transport rates, have weakened against a backdrop of mild weather and bulging inventories, a potential hit on the province's finances even as oil markets look brighter.
Analysts expect prices for the fuel to remain sluggish at least until November, the start of the heating season, when companies begin pulling supplies out of underground storage facilities.
Much of the situation is specific to Alberta, as the discount on prices in the major gas-producing province against the New York Mercantile Exchange delivery point at Henry Hub, La., has widened from the summer when alarms about Canadian gas prices were first raised. The situation has the potential to cut into supplies as producers opt to slow output rather than sell into a down market.
"We've seen some dips that didn't appear as much last year, and certainly not as pronounced," said FirstEnergy Capital Corp. analyst Martin King, who described the current gas market as "cruel."
Natural gas at the AECO storage hub in southeastern Alberta sold on Wednesday for $2.34 per gigajoule, according to the NGX electronic exchange, having recovered from as low as $1.66 per gigajoule on the weekend. The difference between Canadian and U.S. prices, known as the basis differential, has widened to $1.29 per gigajoule from $1.02 at the end of July and around 50 cents a year ago.
Storage volumes in Western Canada grew following changes in tolling on TransCanada Corp.'s mainline to Central Canada, which favour long-term contracts and discouraged some shipments.
This summer, the National Energy Board set a fixed toll of $1.42 per gigajoule through 2017 for "firm," or guaranteed, capacity, down from $2.56 per GJ, and gave TransCanada the power to set tolls for "interruptible" and "short-term firm" service.
The recent interruptible toll to southern Ontario from the Alberta border was about double the actual price of the the gas, Mr. King pointed out.
A positive sign now is a gradual increase in volumes moving east on the pipeline system as more shippers sign up for long-term contracts, TD Securities analyst Aaron Bilkoski said in a report on Wednesday.
The Alberta government was ahead of its revenue projections for natural gas by $15-million at the end of its fiscal first quarter on June 30, according to its recent budget update. The province's March budget predicted natural gas royalties of $965 million this year, compared with $3.37-billion for bitumen.
When Premier Alison Redford's Progressive Conservative government released its budget, it predicted gas would average $3.07 per gigajoule in the year. However, every 10-cent drop would erase $23-million from expected revenue.
"That doesn't account for what's happening in the marketplace right now," Chris Bourdeau, a spokesman for Alberta's Treasury Board and Finance department, said. "That's always a challenge – that our fiscal updates are a couple months behind where we are in the calendar."