Interesting read from Energyshop.com

The Direction of Prices ?

Hmmm. Tough one. Short term gas prices are again getting pushed by their historical tie with oil prices. (Short term price is what the media quotes). Prices have been very volatile despite gas in storage being at about the average. Longer term prices have stayed high due to long term supply/demand fundamentals and the fact that low short term prices last year reduced drilling, aggravating supply constraints. One thing to keep in mind is that natural gas in Canada is priced in US dollars, so if the Canadian dollar goes down, long term gas prices will go up. The historical oil/gas relationship is about a 7.5:1 ratio of a barrel of oil to a GJ, or MMBtu, of gas. That means that with oil at $130, gas should be about $ 17.00 per GJ. It's only at about $12.

Forecasts suggest that natural gas prices will track just below the trend line shown for the near future. How do fundamentals say that?

• Lower production from new gas wells, less new drilling and depletion of older wells.
• New electricity generation is usually gas fired. The gas to be used in planned natural gas generators in Ontario equal a quarter of TOTAL provincial annual demand.
• Supply is flat and is expected to remain so, and demand is up.

March 2008. Oil Extraction Cost Trumps Reserves
Globe and Mail. "According to the New York Mercantile Exchange, that price is currently around $100 a barrel and most of the long-dated WTI futures reflect a belief that the world will still be paying close to a three-digit oil price in five years time."

January 2008 Enbridge Bargain Price Won't Last Enbridge and Union Gas are giving credits to customers to pay back previous overcharges, but this is coming to an end.

November 2007 OPG To Seek 14% Rate Hike Ontario Power Generation, the generator of the majority of electricity in Ontario, is seeking a 14% hike in their rate for electricity.

November 2007 Outlook for Canadian Gas Deliverability The amount of natural gas able to be delivered from Canadian producers to consumers is expected to decline over the next 3 years. Reduced drilling activity, caused in part by relatively low spot market prices, is aggravating this situation.

August 2007 Halifax To Get Natural Gas by December A natural gas pipeline is (finally) being built across the harbour from Dartmouth. About 80% of downtown Halifax has signed on to switch.

August 2007. Conference Board of Canada predicts gas prices to rise at 6% per year.

What was said at the annual Cambridge Energy Research Associates worldwide energy meeting, according to Canadian Enerdata? That North Americans will continue to face high prices to power, heat and cool their homes through at least 2008 and may even endure some natural-gas shortages during cold winters. "I would estimate prices would average about $7 through 2008," said Michael Zenker, an analyst with Cambridge Energy Research Associates. "The rising demand for gas, coupled with flat production, has tripled prices in the last four years. Relief should arrive then in the form of liquefied natural gas, imported to alleviate shortages of the increasingly popular fuel.

September 2004. Energy Pulse in depth article on supply, demand and pricing
Summary: "Natural gas is somewhere between a limit to growth and a disaster waiting to happen right now, and no one is doing anything about it. Only a few months of inclement weather will cause severe shortages and rocketing price spikes. There is a high risk of major availability declines with unimaginable economic impact, and there is no supply side solution."

Go to the Price Charts

What Drives Prices ?

Short Term - Weather, the US economy and gas storage levels.

• Pick your scenario. If this winter is warmer than normal and the US economy continues at it's current pace, the US Dept of Energy predicts that gas prices will rise by about 5%. However, if this winter is colder than normal, the DOE says that consumers can expect double digit percentage increases. What is it going to be? Check out this weather forecasting site.
• Gas storage levels coming out of the winter are higher than average

Long Term - Economic activity, demand/supply balance and the price of oil.

• Natural gas demand in North America is increasing at about 3 % per year whereas supply is increasing at about 1%
• Increasing economic activity, growth, new businesses and new homes increase gas use
• Production from many older gas wells is declining quite rapidly. More
• More natural gas is being used for electricity generation. Any new electricity capacity brought on line right now is generated by natural gas, rather than oil, coal, water or nuclear.
• As the price of crude oil increases, some industries switch to natural gas. Many developed this dual fuel capability when gas prices skyrocketed in 2001.
• Prices are not expected to come down until new major gas pipelines are built connecting new gas fields in Alaska and the Northwest Territories. That is at least 6 years away. Recent reports however suggest that virtually all of this northern gas will be used in to extract oil from the tar sands in Northern Alberta.
• Liquified Natural Gas (LNG) will become a factor in North America, but many terminals and custom tankers will have to be built.