Too Low for Zero - Canadian Natural Gas Prices Experience Another Collapse, Record Discounts

We’ve seen this movie one too many times. Just when natural gas prices are rallying across the world to multi-year or historic highs, another monkey wrench gets thrown into the workings of the Western Canadian gas market, imploding its suite of price markers. Last week, gas prices in Western Canada collapsed to mere pennies and even went negative for a time due to an unfortunate combination of pipeline restrictions and record-high production — a situation that will cost the region’s gas industry billions if left unchecked. In today’s RBN blog, we examine the root cause of the latest price collapse and when a turnaround might be expected.

If you are a natural gas producer in the U.S. or elsewhere, the present and near-term future for gas prices could not seem any brighter. Tight markets in Europe and Asia have sent LNG prices to record levels north of $50/MMBtu, while NYMEX prompt-month futures hit a 14-year high late last week. Henry Hub prices were well above $9/MMBtu at the start of this week as lower-than-average storage levels across the U.S. for this time of year, record levels of gas power burn this summer, and the ever-present pull from LNG exports (which will only get stronger once the Freeport LNG export terminal returns to service in November) have kept a very strong bid under prices. And, as we pointed out in Blurred Lines, that demand strength looks poised to continue as new LNG capacity on the U.S. Gulf Coast transforms the gas market there and around the world. Truly, these are amazing times to be a gas producer.

If you are a gas producer in Western Canada, however, you have been experiencing deeply discounted prices for most of the summer, made worse by a price crash last week. A combination of strong supplies and pipeline restrictions sent AECO day-ahead cash prices — the region’s primary gas price benchmark — plunging to just a few cents per MMBtu on August 18 (dashed red oval in left graph in Figure 1). Another closely watched price marker in the region, Station 2, turned negative for several days last week (dashed black oval in right graph) and only managed to limp into the positive side of the price ledger at the start of this week. Too low for zero, indeed!