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Streetwise Natural gas producers help themselves by lowering production

Natural gas prices in North America are nudging up at a time of year when erosion is to be expected; the low demand ‘shoulder season’ that is sandwiched between the grip of frigid winter cold and oppressive summer heat.

David Olecko/Nexen

Natural gas producers are finally being cautious about how much new supply they offer up.

After scratching their heads as natural gas prices plummeted to roughly $2 per million British thermal units, North American producers finally realized they can't all go gung ho on production because they were collectively flooding the market with too much product.

Their learning curve is similar to what the oil sands producers endured leading up to the Great Recession. As oil prices soared to over $140 per barrel, oil sands producers hired anyone in sight to help ramp up their production, and that led to runaway cost inflation. When they redeployed resources after the financial crisis, the producers smartened up and realized they can't all pile in.

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Proof that the natural gas producers are learning their lesson is seen in the number of drill rigs in operation, which has been slashed by roughly 60 per cent to under 400. That's well below the 575 rigs needed to maintain long-term equilibrium, according to Canaccord Genuity analysts John Gerdes and Martin Roberge.

This constraint has had a huge effect on the market. According to the U.S. Energy Information Administration, natural gas demand over the last 12 months was finally a smidgeon higher than the supply of 25.5 trillion cubic feet, and in just over a year natural gas prices have soared to about $4 from $2.

However, the market has also seen some shifts. The Canaccord analysts note that U.S. producers are seeing their production rates organically erode. So while many people assume that producers can keep churning out gas at their early production rates, delays ultimately set in. (Keep this in mind when assessing the shale oil boom as well.)

Overall, though, very few fundamentals have changed. There's still a boat load of untapped supply in both Canada and the U.S., and there hasn't been much movement in the outlook for liquefied natural gas exports.

It's mostly been about supply control, and the producers can thank themselves for getting smart about it.

(Tim Kiladze is a Globe and Mail Reporter.)

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