The natural gas market has experienced a significant rally despite bearish fundamentals. The optimism that has permeated the equity and crude oil markets spilled over to natural gas, pushing prices up over 30% since April 27th. Considering that natural gas had declined from a peak of $13.57 in July 2008, to a low of $3.25 on April 27th, a correction to the upside was not unreasonable. What was surprising was the velocity with which this market has moved to the upside.

Despite the rise in prices, there remain several fundamental issues for the natural gas market to face, the most obvious of which is storage. Storage is at a very healthy level, currently at 2,013 Bcf after the 95 Bcf injection, inventories are now 497 Bcf (32.8%) above last year, and 374 Bcf (22.8%) above the five year average. At this point, there are still 25 weeks of the summer injection season remaining, and the average injection during that period is 1,732 Bcf, which would leave inventories at 3,745 Bcf, approximately 200 Bcf above the highest  inventory level on record. We are still injecting more than the historic weekly average, and if we continue on our current pace storage could hit four Tcf by the end of October. This is basically at, or slightly higher, than the current maximum storage capacity of the U.S.

The fuel switching from coal to natural gas that has been occurring will likely stop if natural gas prices remain at or rise from their current levels. This represents approximately 1-3 Bcf of demand that could vanish quite quickly.

Even though the rig count has fallen significantly over the past nine months, and continues to weaken, we still have not seen a drop in production data in either the monthly figures or through the weekly storage reports. At some point this will translate into decreased production, but if producers wait too long before shutting in, then it may be too late to avoid a glut in supply come fall. This would definitely not be supportive to prices.

Thus, while there is certainly increased risk to the upside in the longer term due to inflation and a recovering economy, the natural gas market still faces significant headwinds in the short term.

Ziff Energy recently produced a report on North America’s largest shale basins, outlining their production levels, drilling characteristics and forecasted production. Here are some highlights:

Barnett Shale (Currently 3.5 Bcf/day, estimate 3.5 in 2020 Ziff
• The Dallas/Fort Worth area of Texas
• Most prolific shale gas play right now, producing 4 Bcf/day
• Depth of 7,000 to 9,000 feet
Fayetteville & Woodford (Currently 1.1 Bcf/day, estimate 2.7 in 2020 Ziff)
• Arkansas, West Texas
Haynesville (Currently 0.2 Bcf/day, estimate 4.8 in 2020 Ziff)
• Louisiana and East Texas
• This play has the most potential of all the shale plays.
• Depth of 10,000 to 14,000 feet
Marcellus (Currently 0.1 Bcf/day, estimate 1.1 in 2020 Ziff)
• Ohio, West Virginia, Pennsylvania and New York
• Area 5 times greater than Barnett Shale
• Depth of 5,000 to 8,500 feet
Horn River (Currently 0.1 Bcf/day, estimate 1.7 in 2020 Ziff)
• North East BC

If you have any questions on the data above, please feel free to call your Client Services Representative or Dave Duggan.

So far in May, the average HOEP is back into the normal range for a shoulder month (not summer or winter) and negative pricing of HOEP has stopped since the transmission intertie is back in service between Ontario and New York State.  The recession is continuing to take its toll on industrial and commercial demand, so hot weather is likely going to be the main driver of higher prices in the June to September period.

The Ontario Energy Board announced on May 13 that they are going to revise the allocation of the Global Adjustment in the Time of Use RPP Rates starting this November.  They did not announce the details of this change, but will be issuing the new method in an update to the RPP Manual shortly.  We will advise of the impact to consumers when the details are known.