A recovery in oil prices this month has got the market more bullish with an energy sector recovery, however for natural gas, that bullishness may be premature.
Reserves of natural gas in Canada have now hit the greatest level on record with this season, surpassing levels seen during the previous peak this year. FirstEnergy Capital Corp., an energy investment bank, said that the gap with 2012 has become “widening each day,” signalling lower prices ahead.
It is really a worrying trend, because cold weather has become behind the market, leaving less demand in a market oversupplied with natural gas.
“The very mild weather recently has resulted in overall Canadian gas storage levels having risen previously week to some record high for this time of year,” said Martin King, analyst at FirstEnergy Capital.
Like crude, gas has seen the market flooded with excess supply due to the development of horizontal drilling technology and hydraulically fractured shale. Even though oil prices have spiked this month, mainly due to signs that oversupply in the market is easing, there are no signs that the same is coming for gas.
The situation is much more bleak for Canadian natural gas, especially with the recent announcement that a major liquefied gas project in Oregon was denied a permit last week. The work, the Jordan Cove LNG plant, was seen as a potential outlet for gas produced in the Montney shale region near Dawson Creek, Bc.
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“Future outlets for Canadian natural gas supply appear to be shrinking yet again, with the U.S. Federal Energy Regulatory Commission rejecting a pipeline that would have connected Veresen’s proposed Jordan Cove LNG export terminal to the wider gas grid,” said King.
Data from the Commodity Futures Trading Commission implies that bets against gas remain near record levels, suggesting that the market continues to have a very bearish outlook on the commodity.
Natural gas futures have fallen more than 20 percent this year amid rising reserves along with a surprisingly mild winter. Forecasts throughout March suggest that weather in The united states might find above average temperatures, dulling hopes that the market could benefit from a late-season cold spell.
King notes there are signs that some production in Western Canada is easing, with gas directed drilling rigs starting to hit multi-decade lows. That may help tighten supply in the coming months and help prices.
But investors are unlikely to determine a true rally this season. King said that by the time 2016 involves a close, supply could reach new record levels in Western and Eastern Canada.
“As things currently stand, we expect this record setting trend to continue which 2016 storage levels could well finish at record highs after October in both halves of the country,” he said.
Natural gas futures closed up .92 percent at US$1.87/MMBtu around the New York Mercantile Exchange.
