Natural gas levels bad for bulls
A recovery in oil prices this month has the market more bullish on an energy sector recovery, but for natural gas, that bullishness might be premature.
Reserves of natural gas in Canada have now hit the highest level on record for this time of year, surpassing levels seen during the previous peak in 2012. FirstEnergy Capital Corp., an energy investment bank, said that the gap with 2012 is now “widening by the day,” signalling lower prices ahead.
It is a worrying trend, because cold weather is now behind the market, leaving less demand in a market oversupplied with natural gas.
“The very mild weather of late has resulted in overall Canadian natural gas storage levels having risen in the past week to a record high for this time of year,” said Martin King, analyst at FirstEnergy Capital.
Like crude, natural gas has seen the market flooded with excess supply because of the development of horizontal drilling technology and hydraulically fractured shale. And while oil prices have spike this month, mainly due to signs that oversupply in the market is easing, there are no signs that the same is on the horizon for natural gas.
The situation i s more bleak for Canadian natural gas, especially with the recent announcement that a major liquefied natural gas project in Oregon was denied a permit last week.
The project, the Jordan Cove LNG plant, was seen as a potential outlet for gas produced in the Montney shale region near Dawson Creek, British Columbia.
“Future outlets for Canadian natural gas supply appear to be shrinking yet again, with the U. S. Federal Energy Regulatory Commission rejecting a pipeline that would have connected Veresen’s proposed Jordan Cove LNG export terminal to the wider gas grid,” said King.
Data from the Commodity Futures Trading Commission shows that bets against natural gas remain near record levels, suggesting the market continues to have a bearish outlook on the commodity.
Natural gas futures have fallen more than 20 per cent this year amid rising reserves and a surprisingly mild winter. Forecasts for the rest of March suggest that weather in North America will see above average temperatures, dulling hopes that the market could benefit from a late-season cold spell.
King notes there are signs some production in Western Canada is easing, with gas directed drilling rigs beginning to hit multi-decade lows. That could help tighten supply in the coming months.
But investors are unlikely to see a true rally this year. King said that by the time 2016 comes to a close, supply could reach new record levels in Western and Eastern Canada. “As things currently stand, we expect this record setting trend to continue and that 2016 storage levels could well finish at record highs by the end of October in both halves of the country.”
Natural gas futures closed up .92 per cent at US$ 1.87/ MMBtu on the New York Mercantile Exchange.