Canadian natural gas prices could surprise to the upside this year

A warm winter and ramped up production from the Marcellus shale formation in the U.S.

Northeast have led to concerns that Canadian natural gas prices are set to go even lower. A new

report from Raymond James, however, argues that outlook is too bearish.

Natural gas storage levels are at their highest levels in years as a result of the weak winter

demand and flood of new production. Canadian producers are seen as particularly vulnerable to

the current climate because they face increased competition from American producers in the

Marcellus, a region which is much closer to key Northeast markets than the primarily Alberta-

based production in Canada.

“In recent weeks, Western Canadian natural gas prices have been weaker than the already ugly

North American natural gas price complex, with some in the market suggesting that Canadian

natural gas prices will face structurally higher basis differentials versus U.S. prices,” said

Raymond James analyst Kurt Molnar and his team in a note to clients.

But Canadian producers have advantages that their U.S. counterparts don’t have. Canadian

producers have lower operating costs because they tend to own most of their plants and

pipelines, whereas much of the infrastructure south of the border is rented.

Canadian royalty burdens are also lower than those of the Americans, and Canadian condensate

has favourable pricing compared to the U.S.

Molnar says that the market is being too hard on Canadian producers and natural gas

expectations given all those factors.

“Because the scope of the Marcellus resource is so big, some worry that this unusually wide

basis might become structural or permanent,” he said. “We don’t think so. Like the past, this

basis crisis too will pass.”

That doesn’t mean there won’t be damage in the current environment. Mulnar expects many high

cost lean gas producers in Alberta to go bust this year — though a decrease in production will

help in normalizing prices this year.

NGS INDIA