Challenges south of the border could present strong opportunities for Canadian natural gas producers
The first quarter of 2016 was gloomy for natural gas producers in Canada. But as an unusually hot summer precipitated record levels of natural gas burn for power consumption, the commodity rebounded 48% over the rest of the year. Multiple analysts expect another strong year for the resource in 2017, and challenges faced by US producers could be the opening Canadian producers need, according to a piece published on the Financial Post.
“For Canadian natural gas producers, the future has brightened considerably from what seemed to be bleak prospects just 12 months ago,” GMP FirstEnergy commodity analyst Martin King said in a year-end research note. Natural gas will undergo “a multi-year bullish price run,” according to King, who said that “Canadian natural gas markets are well placed to push growing supplies into a hungry US market for the next couple of years.”
The surplus of stored natural gas in the US is “evaporating,” Piper Jaffray & Co. senior analyst Pearce Hammond said in a note published Dec. 22. Another bullish signal, according to Hammond, is the fact that storage levels in the country were set to fall below their five-year average.
Some analysts are cautiously optimistic. “We expect prices to see further gains next year, but a sustained move above US$3.30 per million British thermal units is unlikely given the probability of a rapid supply response from domestic shale drillers,” wrote Scotiabank commodity economist Rory Johnston in a different report.
However, King is not convinced that US domestic shale suppliers will be able to satisfy demand for natural gas. Most of the country’s natural gas is obtained from the Marcellus and Utica shale formations, where drilling capacity may be insufficient to meet the demand in the market. Pipeline constraints, along with challenges to new pipelines posed by environmental groups and state legislators, are another hurdle for US producers.
“All in, we expect that 2017 and 2018 will prove to be one of the most immense challenges in terms of growing US domestic natural gas supplies since the late 1960s,” King said. “With the US market facing immense challenges, we think there are plenty of opportunities for Canadian natural gas supplies lining up over the current heating season and for the balance of 2017 and 2018.”
King estimates that natural gas production from Canada’s Deep Basin in Alberta should increase by 500 million cubic feet per day in 2017, compared to last year’s gain of 400 mmcf/d.
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