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Good news is developing on the natural gas price front, at least for commodity bulls, as a number of signs suggest that the worst could finally be over for the fuel.

Over the past four years, while silver, corn and other commodities have been on a tear, natural gas has headed south.

The current price near $2.89 (U.S.) per million British thermal units, a measure of the gas's energy content, is less than a third of the $8.90 that prevailed as recently as 2008. In April, during a panicky lurch downward, prices cratered to less than $2.

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Some analysts now believe that this year's panic price will be the nadir, to be followed by a steady climb back to higher levels. If the thesis is correct, it implies upside for energy patch companies, such as Encana Corp., which have a heavy natural gas focus.

One immediate reason for optimism is the marked seasonality of natural gas prices. September and October are historically the strongest months for the fuel, as speculators bid for supplies ahead of the North American heating season, hoping that cold winter weather will cause a spike in demand. Late summer and early fall is also hurricane season, which frequently affects supply by causing production shutdowns on wells in the Gulf of Mexico.

CMC Markets, a commodity trading firm, notes that natural gas has rallied an average of 13.4 per cent in September and 11.2 per cent in October over the past 25 years. Prices typically then fall over the winter and the summer months.

One cold winter won't cause a turn in natural gas prices by itself, but it could combine with many other bullish trends.

Among them is a tendency to increased consumption. Natural gas prices tanked because of a disruptive technology that allowed drillers to extract the fuel from previously unexploited shale deposits, dramatically increasing output. In turn, the low prices that have resulted are prompting a huge increase in demand.

Consider Duke Energy Corp., the largest U.S. electric utility. A week ago, it shut a power plant near Goldsboro, N.C., one of a dozen aging coal-fired units it is in the process of closing.

Company spokesman Mike Hughes said it made no sense to put costly scrubbers on the plants to clean up their air pollutants. Instead, it was more economic to replace coal with new gas-fired generating capacity.

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Throughout much of the U.S. utility industry, it's a similar tale of goodbye coal, hello natural gas. "We're a prime example, but certainly not the only example, of utilities that are going through pretty significant coal to gas switching," Mr. Hughes said.

Duke may also be on the cusp of another far reaching trend: switching from nuclear to natural gas. The company is reviewing the repair of its aging Crystal River nuclear unit in Florida. The chatter in the utility industry is that it may be less costly to build a new natural gas plant than refurbish. Mr. Hughes said a final decision hasn't been made, but if the company concludes repairs are uneconomic, Crystal River may be a bellwether for other reactors in the aging U.S. fleet of nukes.

On top of all that, there's the export market – the biggest potential long-term kicker of all for natural gas prices.

Cheniere Energy Partners is revamping its Sabine Pass liquified natural gas terminal in Louisiana to be able to export the fuel, the first facility in the lower 48 states that will have the capability to ship surplus U.S. gas abroad.

The current fuss in British Columbia over building LNG export terminals suggests that Canadian supplies may also be moving offshore.

"When the big LNG export projects commence, I think that will be the turning point for natural gas prices," says Patricia Mohr, commodity specialist at Bank of Nova Scotia.

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Exports may not start until 2015, but Ms. Mohr says the market is already recovering. She expects prices to average $2.75 this year, rising to $3 next.

She thinks another drop, like this year's plunge to below $2, is unlikely to be repeated.

Most of the shale deposits in the U.S. needed prices "much higher than $2 to be truly economic so anything $2 or less is not in the cards. It's not sustainable."

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More


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