In this week’s report we are stepping back to take a ‘bigger picture's view of both the natural gas and Ontario Power markets.

Two majors items in the last nine months have been largely responsible for the decline in natural gas prices:

• Significant demand reduction since the middle of 2008 as a result of the “Great” recession
• Strong U.S. production numbers in 2008 to present

The graph below shows the NYMEX natural gas prompt price for the last 5 years. The NYMEX prompt has an indirect relationship to the price most Canadian customers hedge at AECO. It clearly shows that we are closer to a valley than a peak.

The graph also raises the question “Where is the bottom of the market with respect to natural gas prices?”. Ignoring the impact of the Canadian dollar on hedge prices, the two factors mentioned above may have the following impact on the market in the future:

Significant demand reduction – recession

• Most experts suggest that the world will come out of this recession at the end of 2009 or in early 2010. It would be at this point that you would anticipate natural gas demand to return in the industrial sector.

Strong production numbers

• The natural gas rig count has gone from 1,600 rigs in early September 2008 to 916 as of March 6, 2009. The current low prices give very little incentive for producers to continue drilling at these prices. As such, the rig count will continue to weaken in the next few months. Natural gas production lags drilling by six to nine months, and we should soon start to see the impact of reduced drilling in monthly production numbers as released by the U.S. government’s EIA (current data is only available to December 31st).

So overall, sometime in 2009, market forces indicate that we will hit the bottom with respect to natural gas prices.

Ontario Power

Average ON PEAK Price for Mar: 5.0 cents / kWh
ON PEAK Hours over 7.0 cents: 18 % in Mar.
16 % year to date
Highest price in the past week: 22.5 cents / kWh on Mar 3rd
We have been noticing the effects of the recession on the economy in general, but sometimes a graph can show things even more clearly. Below is the average monthly demand for power in Ontario since January 2007.

A fairly steady decline in demand is evident, but the February months are particularly striking. Demand has gone from an average of 19,398 MW in February 2007 to 17,408 MW in February 2009. These numbers do not account for changes in the weather, but the decline in power consumption is definitely influenced by receding industrial economic activity in Ontario.