New signs of future market tightness in North America's natural gas sector continue to be manifested.
The latest bullish trend is what Boston-based Energy Security Analysis Inc. terms the continuing "arraignment" of the gas industry before the investment community, regulators, and the public. The spillover from the Enron Corp. meltdown has contributed to a brutal spotlight trained on the similar big energy merchant firms, now grappling with tussles with regulators, congressional investigating committees, and litigators. The erosion of value among these companies has spawned some liquidity crises that is affecting the gas sector overall.
ESAI contends that the media spotlight has severely constrained the industry's ability to develop new resources and thus head off an imminent supply crisis. ESAI Senior Analyst Mary Menino said: "Despite (New York Mercantile Exchange) strips well above $3.00(/MMbtu), drilling activity has failed to pick up. All indications are that gas production has fallen off year-on-year and that 2002 US output will be down 4-5%.
Canadian exports down
Another factor is slumping Canadian gas production and hence exports to the US. Lehman Bros. analyst Thomas R. Driscoll noted that the key Canadian gas supply factors are down while Canadian gas demand rose 3% year-on-year as of June; correspondingly, Canadian gas exports, year-to-date as of August, plunged 6% from 2001's record levels.
Lehman Bros. forecasts Canadian exports for the full year will be 2-6% below 2001 levels as Canadian gas consumption rises an expected 1-3%.
Looking at the specific Canadian supply factors, total Canadian gas production year-to-date in July was flat and would have been down 2% on the year had it not been for the Ladyfern area's contribution (although Ladyfern production itself has declined sharply in the third quarter); total western Canadian gas output was down 0.7% on the year as of Sept. 9; Canadian rig utilization was down 25% on the year as of the week ended Sept. 3; and Canadian gas completions in July were off 8% from the year prior.
Gas storage positive
Despite industry concerns over the role of gas storage in recent market weakness, the latest signs are positive here as well.
While the injection of 65 bcf into storage for the week ended Aug. 30 was roughly in line with the previous 5-year average, RBC Capital Markets analyst Joseph D. Allman noted that it fell 17 bcf below what the weather suggested it should have been. It was, in fact, the sixth consecutive week in which injections were below what the warm weather suggested. Allman points to the continuing gas production decline in the US and Canada—which he estimates at 5% year-over-year in the first half—as having the greatest impact on storage levels.
So while the market had been concerned about US gas storage reaching technical capacity of 4 tcf and thus spawning a wave of shutins, the likelihood now is that storage will be 3.214 tcf at the end of the cooling season Nov. 1—a bit below last year's record peak Nov. 30 of 3.254 tcf and 7% above the 5-year average.
But industrial demand is also chipping away at the year-on-year gas surplus, Allman noted, citing the rate of electric power production growth outpacing the relative increase in weather-related demand.
UBS Warburg's Ron Barone estimates the year-on-year storage surplus fell to 182 bcf the week ended Sept. 6, vs. 205 bcf the prior week and 216 bcf the week before that. Barone reckons the surplus will shrink to as little as 75 bcf by the end of September.
Oil prices, demand
In addition, the drums of war in the Middle East are contributing to support for natural gas prices as well as oil prices.
Contributing to that outlook is the likelihood of heating oil demand this winter keeping distillate stocks below comfortable levels, putting further upward pressure on the price of the chief winter competitor for natural gas.
Barone notes the 12-month NYMEX strip trading the week ended Sept. 6 at $3.84/MMbtu, up from $2.96/MMbtu the same time a year ago.
Odds are that strip will grow through the winter.
(Online Sept. 13; author's e-mail: [email protected])
