Employees keep watch on systems and operations at the American Electric Power (AEP) Appalachian Power Co. natural-gas combined cycle plant in Dresden, Ohio in November, 2015.Ty Wright/Bloomberg
Natural-gas markets are sending out bullish signals. Beware.
Tightening supplies, new outlets for demand, movements on pipeline tolls to make Western Canadian gas more competitive – if the summer's a scorcher, prices could take off.
The risk in all of it is one that's always lurking in the gas market: when wholesale prices climb into the sweet spot where shale fields can be developed at a reasonable profit, or when futures markets yield attractive opportunities to hedge, production quickly shoots up again. The party ends. It's the way of the on-demand gas world brought about by fracking technology.
"When you get good prices, you can bring on a lot of gas quickly. When you get low prices, you hit some pretty steep declines," Raymond James analyst Jeremy McCrea said. For much of the past year, it's been the latter. Indeed, Platts, the energy data service, said U.S. production is down 2.8 billion cubic feet a day from a year ago, a volume equal to almost a fifth of total Western Canadian production.
It's similar to what's happening in global oil markets, where supply cuts among Organization of Petroleum Exporting Countries members and their allies gave an uplift to prices, wooing drilling rigs back to U.S. shale oil fields in Texas and elsewhere. There, two years of downturn have ground operating costs down and driven efficiencies up, raising prospects that supplies will recover and keep a lid on market gains.
The gas industry is days away from its official shift out of the winter heating season, when storage facilities move from withdrawal into injection modes. Spring's not looking bad for producers.
In Canada, Alberta spot gas sold for $2.53 a gigajoule on Tuesday, about double the price of a year earlier, though down 23 per cent from the frigid beginning of this year, according to the NGX electronic exchange.
U.S. futures prices, meanwhile, have jumped 21 per cent in the past five weeks.
Besides the production decline, there are a bunch of supportive fundamentals in play. First, there are U.S. inventories, which at last tally were down 16 per cent from the same period last year. Canadian storage withdrawals, meanwhile, outpaced last winter, according to GMP FirstEnergy.
"Storage still looks low, so I think the market is already correctly anticipating a tight storage refill season, and if the weather is hot, then we're definitely going to need higher prices to back gas out of power generation [and into storage]," GMP FirstEnergy analyst Martin King said.
Meanwhile, deliveries to the new Cheniere Energy Inc. liquefied natural-gas export facility on the U.S. Gulf Coast topped 2.4 billion cubic feet a day this month, and the capacity of that facility is on track to expand, lifting demand further.
On the transport front, moves are afoot to get more gas to key markets at competitive rates. First, TransCanada Corp. struck a deal with shippers for long-term pipeline tolls to Southern Ontario at rates allowing their supply to compete with growing volumes from the Marcellus. The company offered 10-year contracts at reduced rates in a second try at an arrangement producers rejected last year.
In a longer-term move, TransCanada has applied to build a $1.4-billion pipeline to ship gas out of the Montney region of British Columbia. Under a newly revised plan, the project would proceed even if there is no major West Coast LNG plant to take the supply – the original reason for the proposal. The Montney is the site of some of the continent's busiest drilling and multistage fracking, a technology that keeps yielding better results, forcing the need for more capacity.
This summer, however, the area is expected to suffer short-term supply constraints as TransCanada conducts maintenance on its pipeline system, with a big portion of the work slated for August.
Overall, the market looks to be setting up for gains come the start of the next heating season in November. Of course, weather will play a critical role – the hotter it gets in the U.S. Midwest and Northeast, the more air conditioners fire up, the higher the price.
But look out – it doesn't take much for producers to respond with new supplies, and technology for doing that keeps improving. They've shown over several years how they can become victims of their own success.
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Jeffrey Jones