A searing heat wave south of the border could have longer lasting effects on natural gas prices in Canada than a recent increase because of air-conditioning demand, said industry observers.
Natural gas prices have gained almost five per cent in the past three trading days, settling Tuesday at $4.333 US per million British thermal unit.
The moves come as threats of a supply glut in late summer diminishes as inventories are drawn down to feed power generation -and air conditioning -demand. The increased consumption is lifting the spectre of limited storage capacity and a price collapse, analysts said.
This week's rise in prices is short term, noted Martin King, analyst with FirstEnergy Capital Corp.
"What's more important from this side of the border is finally, after waiting for weeks and weeks and weeks, it looks like we're finally getting more of a consistent pickup in net exports of Canadian natural gas," said King. "It's partly a demand thing tied to power generation so you're seeing a slow down in storage injections in the U.S., but that will also help to slow down our injections as well."
Net exports to the U.S. have rebounded to six billion cubic feet per day, from around five bcf per day, he said, noting the numbers were about one bcf per day lower than last year. Not that producers are changing their capital plans yet as prices haven't broken through a higher range, King said. "Until that happens and until there's more empirical data that suggests price upside is more sustainable, I don't think you'll see much action out of the gas producing community."
Despite higher production volumes being pumped out in the United States, storage levels entering the winter heating season are expected to be around 300 billion cubic feet lower than last year.
Also on Tuesday the United States Energy Information Administration revamped its short term energy outlook to nudge up 2011 production by 1.2 per cent to 65.39 bcf per day, and its 2011 price outlook up by two cents to $4.27 US.
A drop in active rig counts and stronger increase in commercial and industrial demand would have a longer-lasting effect on prices than weatherrelated trading, said C.J. Hilling, with ATB Financial.
"Supply has not come off as much as some of the producers would like to get a bit of an uplift," Hilling said. "You really need some of the rigs to fall off in the States, and some more of the commercial demand to pick up again. "
According to the EIA, overall natural gas consumption in the U.S. will increase slightly this year to 67.43 bcf per day, up from a forecast of 67.06 bcf per day made in June.
