Weak prices continue for natural gas S trong crude prices will drive an increase in drilling across Canada next year, with oil wells outpacing natural gas for a second year running, according to industry observers. Oil well licences outstripped gas this year for the first time since 1997, as sinking natural gas prices discouraged drilling, analysts noted Monday. In 2010, crude wells are expected to represent 66 per cent of the licences issued in Canada, a jump from 50 per cent seen last year, UBS analyst Chad Friess said. "Though we remain cautious that natural gas fundamentals will act as a headwind, we see no shortage of oil-focused opportunities in Canada where producers can direct capital," Friess stated in a morning research note. "In short, we believe oil drilling will more than pick up the slack from any weakness in gas drilling, as overall producer budgets should be flat year-over-year." The investment brokerage forecast 13,000 oil and gas wells will be drilled in Canada in 2011, up from an estimated 11,600 predicted for this year. Such forecasts are reasonable given the sustained prices seen for crude oil and forecasts of modest increases in demand from Asia and India, said Roger Soucy, outgoing head of the Petroleum Services Association of Canada. Natural gas prospects are another story, as prices have tanked in the past 18 months, he said. "Gas prices are just in the toilet and we don't see it changing to any significant degree until 2012," Soucy said. "All of the pressures are downward." Natural gas prices will likely rise as heating demand grows this winter, but not enough or for long enough to encourage drilling for the resource, particularly shallow gas, he said. The association is preparing its annual drilling outlook for release on Nov. 1, the day Soucy will retire as president. On Monday, natural gas futures fell to 13-month lows, hitting $3.421 US per million British thermal units before closing at $3.431 US as forecasts for continued warm weather and burgeoning inventories pressured prices. Oil prices rose on expectation refinery strikes in France would draw U.S. gasoline and distillate stocks for export. The per barrel price settled $1.83 US higher at $83.08 per barrel Monday. While crude futures are expected to remain strong, CIBC World Markets predicts a brief retreat from the $80 US per barrel range as markets recognize and adjust to the reality of steady, not increased demand. Each breach of $80 US per barrel this year has been met by a drop in oil prices and oil-weighted equities, according to analyst Andrew Potter. "Based on the trend in the trend, we would not be surprised to see another sector pullback in the five per cent to 10 per cent range as there has been little fundamental change in oil supply/demand to keep prices high," Potter said in a morning note. "Despite short-term pullbacks, we see reasonable value and forecast long-term prices of $85 US."

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