If the ancient Greek storyteller Aesop were alive today, he might have written a fable about North American energy markets. Aesop's sheet of papyrus may have ended with the moral: "If you wait long enough, gas prices will go up."
Last week, the ticker showed the highest continental natural gas prices in four years, momentarily bobbing above $5.50 (U.S.) per 1,000 cubic feet (Mcf) in the United States and $5 (Canadian) in Canada. We know Aesop could have easily penned another truism, "Cold weather drives higher prices," but would he have offered the more complex wisdom: "Prices under $3.50 are not sustainable?"
Are we to believe that the days of two or three dollars for a 1,000 cubic feet of the coveted heating fuel are gone?
Since December, the shivering populace on the eastern side of the continental divide have dialled up their thermostats and brought vigour back to winter natural gas consumption. Scenes of snowy roads and frosty mustaches made it look like conditions were exceptionally frigid in the U.S. and Canada. They were (and still are). But averaged over the span of the continent, the numbers tell a different story; the spreadsheets show that what we have been experiencing is nothing more than a good old-fashioned winter. While thermometers have been showing cold in the east, readouts in western states like California have been indicating warm temperatures.
Of all the natural gas burned in North America in one year, between 30 and 35 per cent is seasonally related to warming up our bodies in the winter months. Heating Degree Days (HDDs) are a measure of cold weather intensity that correlate directly to natural gas consumption. Figure 1 shows weekly U.S. HDDs from 2000 to present. The seasonality of heating is obvious: Furnaces are turned off in mid-summer and blowing hard in the third week of January.
What's notable about our HDD chart this week is that there is nothing notable about this winter of 2013-14. Total HDDs have been close to the long-term average, back to 2000. In fact, this winter's performance is unremarkably reminiscent of the winter of 2009-10.
It was the winter of 2011-12 that was weird – one of the warmest on record. And last winter, that of 2012-13, was also anomalously short on heating, and therefore gas demand. Back to back, these abnormally weak winters were juxtaposed against excessive gas output from shale drilling. On top of that, large quantities of associated gas – natural gas liberated as a byproduct from oil drilling – also pressurized the pipeline gauges to "full." Storage levels ballooned out as a consequence. Not enough consumption and too much production combined in a "perfect storm" that pummelled gas for two years hence.
Today, North American natural gas production is still rising, but nowhere near the growth rate experienced between 2007 and 2012. During that boom era, productive capacity in the U.S. expanded by 20 per cent (10 billion cubic feet a day). Today, output growth is running at a reasonable 2 per cent to meet incremental demands, which means that the demand-pull of a normal winter isn't masked by a surplus of production.
By the numbers, this coming year is like déjà vu 2010, which was arguably a pretty "normal" year. Volumes of natural gas in storage today – where supply meets demand – are on a restrained 2010 trajectory. By association, price indications for 2014 also seem to be tracking 2010. Back then Henry Hub averaged $4.40 (U.S.) Mcf while AECO logged the year at $4.00 (Canadian) Mcf. Those numbers are reasonable expectations for 2014.
Yet neither producer nor consumer should believe that $4.00 (U.S.) Mcf ($3.50 U.S. Mcf AECO) is a stable price, although the bias is for a firmer floor. Volatile weather will always conspire to rattle the markets up and down. Fundamentals are running hot and cold too. New drilling and completion techniques continue to improve productivity, yet the marginal cost of bringing dry gas to market is still obscured by waste gas coming from oil drilling. Production growth is becoming increasingly dependent on "sweet" areas like the Marcellus (concentration of assets is usually accompanied by greater volatility). And the price impact of potential liquefied natural gas exports may excite markets in a couple of years.
More than anything, the past couple of months remind us that natural gas is a commodity that can't sit still. Prices are, and will continue, to be volatile. So it's prudent for both producers and consumers to heed Aesop's advice in his classic winter fable, The Grasshopper and the Ant: "It is wise to plan for tomorrow today."
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.
Peter Tertzakian