This past summer, natural gas prices on the Alberta trading hub slid into negative territory. Not only did gas producers not receive cash for their commodity, they actually had to pay buyers to take their product. Several industry veterans declared this unprecedented; although gas occasionally goes negative for an hour or two due to pipeline constraints or other transient imbalances, never had gas traded through and closed a day at less than zero – a worse than worthless commodity.
If this wasn’t the nadir of Canada’s natural gas-producing sector’s seven-year-long nightmare, what might it be? And is this then the exact time for canny investors to pile into Canadian natural gas stocks? A cyclical philosophy of commodities would argue for “yes.” True, it seems counterintuitive. Every commodity has seen false dawns and premature market calls, triggering big losses for those who load up ahead of a yield curve that proves to be a downward slope.
And true, Canada’s natural gas sector keeps suffering bad news: cancellation of the West Coast liquid natural gas (LNG) export project; high pipeline tolls; continued growth of U.S. shale gas production; high gas storage levels; warm winters; and more. Investors have reacted accordingly. Some of Alberta’s best run, most efficient gas producers have seen their shares crushed. Reportedly, U.S. hedge funds have actually shorted Canada’s energy sector.
I had no reason to doubt that this conventional wisdom destined Alberta gas producers to additional years of shunning by the capital markets, until a recent seminar by Turnstone Strategies Inc., a small Calgary-based energy price forecasting consultancy. Owners Duncan Robertson and Gil Dawson – both former oilpatch geoscientists – see signs suggesting that natural gas is becoming primed for a turn. Turnstone’s forecasting process rests on the premise that commodities are eternally cyclical. Short-term supply and demand are influenced by weather, natural disasters, political manipulation and war, but those influences merely result in differently shaped price curves. The prices themselves, though, always cycle.
After successive years at high to record levels, the Turnstone duo point out, North American natural gas storage levels have eased back to their long-term weekly averages. Shale gas production, now at well over half of U.S. natural gas production, appears to have levelled off. U.S. exports to Mexico continue to grow. U.S. LNG exports now take up material volumes of gas, while numerous LNG export facilities are under construction. Domestic demand continues to grow.
Natural gas supply and demand are in a finer balance than they have been in years. Added to that, North America’s past two winters have been warm. In Turnstone’s view, this combination of factors puts us just half a cold winter away from booming natural natural gas prices. Such a turn couldn’t come soon enough for hard-pressed Canadian gas producers and their dwindling base of loyal investors.
More of Koch’s articles can be read at www.drjandmrk.com.
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