In Canada, companies have slashed capital spending and are poised to cut deeper in 2016 as cash flow dwindles.TODD KOROL
Natural-gas prices have slumped to their lowest for a December in 17 years, heaping more financial pressure on cash-strapped energy companies trying to cope with the collapse in crude oil.
The industry counts on prices for the fuel climbing in the winter heating season, but a combination of unseasonably warm weather and bloated inventories has pressured the market to the point where wells are being shut off in Canada and the United States. Hopes for a sustained improvement in prices are waning.
A longer-term pressure has been massive growth in shale-gas production in regions such as the Marcellus formation in the northeastern United States, and the industry's new-found ability to increase output quickly when prices and demand dictate.
"What you see is an alarming accumulation of spare production capacity," Teri Viswanath, an analyst at BNP Paribas, said in an interview in Calgary. "It's not just supply in the market that we're measuring, which is, by the way, at a record level. It's also … that we have a heavy level of inventories, a measure of supply that can be brought to market quickly."
On Friday, U.S. benchmark natural-gas futures settled at $1.99 (U.S.) per million British thermal units, down about one-third from a year ago and the lowest for a December since 1998.
Canadian gas has also fallen sharply. Wholesale supply at the AECO storage hub in southeastern Alberta fetched $2.11 (Canadian) per gigajoule, down from $3.12 last year, according to the NGX electronic exchange.
Already-weak U.S. gas futures fell last week after the U.S. Energy Information Administration reported inventories of nearly 3.9 trillion cubic feet for the week ended Dec. 4. That is 15.3 per cent above the year-earlier volume and 6.5 per cent more than the five-year average.
Depressed gas markets on top of crashing crude prices are dealing the energy industry a double whammy. Oil's fall gained momentum in the days since the Organization of Petroleum Exporting Countries resisted calls to lower production quotas. On Friday, U.S. benchmark oil settled at a near-seven-year low of $35.62 (U.S.) a barrel.
In Canada, companies have slashed capital spending and are poised to cut deeper in 2016 as cash flow dwindles. Longer term, this could help lift gas prices with just 23 per cent of the country's rigs tapping new supplies, according to the Canadian Association of Oilwell Drilling Contractors.
Martin King, an analyst at FirstEnergy Capital Corp., said he is not ready to write the winter off for some strengthening in prices. The industry's heating season runs from November through March, when utilities and other customers withdraw supplies from underground storage facilities. Peak demand tends to be in January and February.
"Even warm winters have their cold snaps, and traditionally the coldest part of the winter is still ahead of us," Mr. King said. "That can swing your balances 400 billion to 500 billion cubic feet easily if you get cold weather."
Indeed, the polar vortex that brought bone-chilling temperatures to major markets in 2014 sent demand skyrocketing, draining inventories to about half the five-year average for the end of that heating season. Fear spread that the industry would be unable to fully replenish stockpiles by the following winter.
The fear proved unfounded. Companies in the Marcellus and other shale-gas regions proved that supply can respond to what's needed, when it's needed. Stocks roared back to historical levels by November. "It's become a de facto storage facility," Ms. Viswanath said.
Until exports of gas start in a major way, the industry will look to gas-fired electricity to bolster demand when prices fall to the point where utilities have incentive to switch from coal. However, that has a limit, and it is drawing near, she warned.
"As we look at 2016, we know we've got this spare production capacity, we've now hit a point in which we're saturated. We can no longer balance this market by burning more in the power sector. Power demand will no longer act as a release valve for low prices in North America," she said.
"In order to keep the gas market balanced in 2016, you're going to have to price supply off the market. For the first time in more than eight years, I'm actually forecasting production losses in 2016."
Jeffrey Jones