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Why Natural Gas Prices Are Poised to Rally

Peter Buchanan – CIBC World Markets Inc.

Special to The Globe and Mail

Published Thursday, Oct. 10 2013, 3:16 PM EDT


Globe editors have posted this research report with permission of CIBC World Markets Inc. This should not be construed as an endorsement of the report’s recommendations. For more on The Globe’s disclaimers please read here. The following is excerpted from the report:

Natural gas, left in the dust by oil’s rally, could soon be rising for reasons other than seasonal temperature variations. The explosion in U.S. shale gas production, and modest increases in other non-conventional gas sources like coal bed methane, have meant stiff competition for Canada’s oil and gas sector in recent years. Our natural gas output has plummeted by 25 per cent in the last half-decade as lower cost production stateside has made inroads into traditional markets for Canadian gas in both the U.S. and in Eastern Canada.

There are signs that the period of exceptionally low prices that has dented this key Canadian resource may be coming to an end. That doesn’t mean a return any time soon to the past decade’s double-digit price peaks, but it does mean $4-5 is likely to be the new norm as compared to prices as low as $1.80/MM Btu, a quarter or less of oil, in energy equivalent terms. We expect North American natural gas prices to average $4.30/MM Btu in 2014, up from an average of about $3.70 this year. Events like the recent energy-centred Abe-Harper summit, and British Columbia’s efforts to reach agreement on a tax framework for LNG exports, have also focused attention on Canada’s own world class shale gas resources.

Challenges remain, but longer term those could potentially offer economic and other spinoffs comparable to the U.S. shale gas revolution.