So, what’s up with natural gas anyway?

Lost in the ongoing chaos of the oil market, natural gas markets continue to plug along, conveniently ignored, shunted to the side.

Part of the reason for this is that the oil market is way more exciting, rife as it is with international  players, shadowy bogeymen and terms like “The Prize”, “The Great Game”, “Glut” and “Rout”.

But the reality is that natural gas and its accompanying infrastructure, production and consumption is in many ways just as important to the energy world as is oil.

The United States is the world’s largest producer and consumer of natural gas and Canada is the largest source of U.S. natural gas imports. The natural gas market in North America is supplied by a vast and complex network of pipelines which allow the gas to be economically delivered to all its various end uses.

In the United States in particular, the horizontal drilling and fracking boom has led to spectacular supply growth since 2006. The supply growth in the U.S. comes from various shale plays, in particular the early plays such as the Barnett, Fayetteville and Haynesville and the current juggernaut in the Marcellus and emerging areas such the Utica shale.

Since gas is harder to transport across the ocean than oil, it tends to trade on a continental basis, and with the emergence of the huge shale gas supplies in North America (the so-called 100 years of supply), the price of gas  is currently substantially less here than it is in Europe and Asia (hence the drive to create Liquified Natural Gas (LNG) facilites in North America to take advantage of this spread in prices).

But as gas prices have stayed stubbornly low, production growth appears to have stalled, at least in the short term. In the past few years, each of the original three plays is down significantly from their peak production level and now growth Marcellus appears to be taking a breather. Does this mean that the supply isn’t there? No, but at these prices, capex and spending is being restrained in the shale regions and at the same time, conventional dry gas production is declining. So overall US production is declining as a result.

On the other side of the supply/demand equation, consumption is expanding as EPA clean air rules trigger a swtich from coal to gas-fired generation, exports to Mexico increase and LNG projects steam ahead. The EIA predicts that these three elements combined will account for 10% of production this year and up to 25% of production next year, which doesn’t leave much room for consumption to grow elsewhere absent supply growth.

So production growth is stalled and demand is growing. Seems like the table is being set for some form of price rally in natural gas over the next few years which should also open the door to some incremental Canadian imports.

Prices as at August 7, 2015 (July 31, 2015)

• The price of oil continued to decline during the week as heavy negative sentiment overcame any positive news in the market
  • Storage posted a surprise decrease
  • Production increased by about 50,000 barrels per day in the Lower 48, but the market focused on the week over week increase rather than the overall decline trend.
  • The rig count posted a surprise increase.
• Natural gas held its ground and rallied slightly during the week on weather, demand and storage

• WTI Crude: $43.77 ($46.71)
• Nymex Gas: $2.800 ($2.716)
• US/Canadian Dollar: $0.7613 ($ 0.7639)

Highlights

• As at July 31, 2015, US crude oil supplies were at 455.3 million barrels, a decrease of 4.4 million barrels from the previous week and 89.7 million barrels ahead of last year.
• The number of days oil supply in storage was 27.0, ahead of last year’s 22.1.
• Production increased to 9.465 million barrels per day from 9.413 with lower 48 accounting for the increase. Production last year at the same time was 8.513 million barrels per day.
• As of July 31, 2015, US natural gas in storage was 2,912 billion cubic feet (Bcf), which is 2% above the 5-year average and about 23% higher than last year’s level, following an implied net injection of 32 Bcf during the report week.
• Overall U.S. gas consumption declined by 0.7% this week, with a slight decrease in all sectors.
• Oil rig count at August 7 was up to 670 from 664 the week prior.
• Natural gas rigs drilling in the United States rose this past week to 210 from 209.
• As of August 4, the Canadian rig count was up to 205 (27% utilization), 132 Alberta (25%), 33 BC (40%), 35 Saskatchewan (28%), 5 Manitoba (28%)). Utilization for the same week last year was 48%.

Drillbits

More reports this week – some high (low?) lights

• CNRL – Adjusted Net Earnings for the quarter of $178 million ($1.15 billion). The Company also took a charge of $579 million related to Alberta’s higher corporate tax rate.
• Enerplus – Cash Flow for the quarter of $160 million ($213)
• Pengrowth – Cash Flow for the quarter of $111 million ($121)
• Gibsons – EBITDA of $76 million for the quarter, 9% less than the same period a year ago

• The longest Canadian Federal election since 1872 got under way while most Canadians weren’t paying attention. Judging by social media, this may prove to be a particularly polarizing battle. The outcome does have major implications for energy in Canada – a topic for a future blog perhaps?
• Speculation runs rampant that President Obama will finally announce a decision (likely negative) regarding the Keystone XL pipeline sometime in August while Congress is out on summer recess. It is possible, however from a diplomatic perspective, it seems unlikely, as any annoucement now while a major trading partner (and counterparty to the decision) is in election mode could be seen as an attempt to influence the politics of an ally. Should the announcement come though that will tell us all we need to know about how Obama feels about relations with Canada.
• Donald Drumpf!… and that’s all I have to say about that.