For several years now Canadians have been used to falling natural gas prices. Since the price spikes of the 2000s, the price of this key fuel has been falling. New hydro-fracking technologies have opened up so-called tight gas formations, and so price of natural gas has been relatively low—but some are beginning to question how long the low prices will continue.
In a recent interview, Dan Bastasic, vice president of investments and lead portfolio manager for the IA Clarington new Strategic U.S. Growth & Income fund, suggested as much. “I think we could see $6 [per MMBtu] in the years ahead.” This would would be up from current rates of between $3 and $4 per MMBtu.
The shift will be a consequence of a mix of shifting market fundamentals. On the demand side, the fuel is being used more for transportation, the fastest-growing segment of demand. Some trucking companies, worried about the price of gasoline and diesel, have begun outfitting fleets to run on natural gas. The fuel is also being used for electricity generation more often. The recent new emission rules announced by the White House seem to suggest more natural gas, less coal, will be burned in America in the future. As well, the housing situation in the United States is evolving into a new growth phase. The occupancy of homes that was foreclosed on during the housing crisis is rising, and so is demand for natural gas in the residential sector.
Another story few are paying attention to right now: Re-injection of natural gas into storage caverns this spring is lagging. This past winter was cold and long. Much more gas than was expected was taken out of storage. Now, in the the re-injection season inventory levels are at an 11-year low. Those keeping an eye on the natural gas market suggest that if this is another “normal” winter, prices will have to rise. “I think we are going to be surprised on re-injection,” says Bastasic.
The natural gas bulls also point to the increase in speculators in the market. The recent geo-political tension in Russia and Ukraine—a dispute, at least partly, based on control of natural gas revenues—has created volatility. The speculators are feasting on the moves. Russia has already upped the price it is charging Ukraine for natural gas, and recently cut off supplies to Ukraine when the country balked at payment. Many expect new LNG production and exports from the United States to help temper that situation, otherssuggest exports of natural gas from America will not really impact the global situation and that exports are only mentioned for political reasons.
All-in, many expect natural gas to rise. “We were saying a couple years ago all we need is a "regular" winter and 2 and 3% growth we're going to have a $4 or $4.5 price of natural gas again. That call was right on,” says Bastasic. He expects natural gas to go to $5 in the year ahead. “If we have another cold winter it'll be $6.”