Martin King: The Most Promising Natural Gas Price Outlook In Years
With the latest heating season in North America getting underway, the natural gas industry in Canada, the United States, and even globally, is experiencing a gas price surge and price levels unlike any that have been seen for many years.
In the case of Canada and U.S., it was way back in 2008 and 2009 when prices were near current levels heading into a heating season (US$5 to US$6+/mmBtu); for the global gas market, it has never before experienced prices such as those currently being reported (>US$30/ mmBtu).
Even the overused words “energy crisis” have been bandied about to describe the current natural gas pricing situation in North America and globally.
With such fervor currently gripping natural gas, it seems like an appropriate time for RBN to review its previous natural gas pricing outlook for 2021, presented back in January, and consider a new outlook for 2022.
At the time of that previous outlook, we offered up a scenario for an average AECO price of $2.43/GJ for 2021. This was based on our practice of not providing any specific price forecast, but offering up various price scenarios encompassing low-, mid- and high-price cases. The $2.43/GJ average was based off our mid-price scenario for 2021 which, at the time, looked very reasonable from the standpoint of average AECO forward prices for the remainder of 2021 as they stood in early January.
Although only 10 months have transpired since that previous outlook, the natural gas market has undergone a significant positive shift in its price fortunes. The average AECO price to the end of October this year was $3.25/GJ, with cash prices at the time of writing around $5.00/GJ. If the average price to date were to prevail for all of 2021, this would be the strongest average AECO price since 2014 ($4.24/GJ); if current cash prices held sway for the remainder of the year, the AECO price average would be closer to $3.60/GJ. In both cases, this is well ahead of the $2.43/GJ outlook we offered up at the start of the year, driven upward by very bullish fundamental developments over the course of this year.
These developments can be summed up as essentially much stronger heating demand in the back half of the previous heating season (especially during February), which helped draw gas storage levels below previous expectations. In the case of Alberta storage, the March exit was 265 bcf, about 10 per cent lower than anticipated back in January.
A solid post-COVID recovery in domestic natural gas demand across North America also ensued over the course of this year, while U.S. domestic gas production was slower to recover from the 2020 downturn against a surge in its LNG exports, forcing a strong call on imports of Canadian natural gas to help backfill the difference. When combined with what has been some feedback to AECO prices via the U.S. market’s closer connections to international natural gas prices, the combination has been a bonanza for AECO in 2021.
As for what may be in store for average 2022 AECO prices, RBN does not provide specific price forecasts, but as mentioned earlier, considers price scenarios by which to gauge market responses. These scenarios do not forecast highs or lows, but do have some relationship to historical and forward prices. Using our current mid-price scenario for 2022 Henry Hub prices at US$4.54/mmBtu, this translates via our exchange rate and price differential (basis) assumptions as an average AECO price of $4.61/GJ.
This would be more than $1/GJ stronger than what may transpire for this year, and is modestly stronger than the market’s current 2022 AECO forward average price near $4.40/GJ. However, both are stronger than the 2014 average price of $4.24/GJ, itself the strongest average AECO gas price since 2008 ($7.73/GJ). Given our mid-price case and the market’s current forward thinking, 2022 average prices could be flirting with the best levels seen for AECO in 14 years, a very bullish development for the Canadian natural gas industry after the exceptionally low-price years from 2015 to 2020.
Given the hype in the current market around the potential for strong storage withdrawals this winter and for these withdrawals to support, or even increase, prices in 2022 from current levels, our current outlook for Alberta gas storage levels over the coming winter and the 2022 storage injection season does not look that dire.
We expect that Alberta gas storage will be starting the current heating season at 384 bcf (purple column), well short of our prior outlook of 445 bcf. Though significantly lower as a starting point, we expect that withdrawals over the heating season will be near 140 bcf, very close to the five-year average, but well below the withdrawal of winter 2020-21 (214 bcf). This would yield a March 2022 exit for Alberta storage at 249 bcf (red column), just 16 bcf lower than the prior year and 37 bcf lower than the five-year average. By the end of October 2022, we see Alberta storage rising to 414 bcf (green column), a 30 bcf surplus to this year’s October finale and in line with the five-year average. Though Alberta storage is not the be-all and end-all for storage developments elsewhere in North America, it does act as a good barometer for the relative strength of AECO prices. As such, improved Alberta storage balances in 2022 suggest that current prices may be on the overly bullish side and that lower average prices, near our mid-price scenario, might prevail.
That more sedate gas storage outlook for Alberta is powered by what we expect will be a very strong year for natural gas production in Western Canada. After down years in 2019 and 2020, 2021 is lining up for a gain of 0.6 bcf/d (and better than our prior 0.2 bcf/d growth expectation). With current four-year highs for gas-directed drilling in Western Canada expected to hold over the coming winter and into mid-2202, RBN is anticipating strong production growth of 0.8 bcf/d in 2022.
When considering that the U.S. Energy Information Administration’s (EIA) current outlook calls for a very strong gain in U.S. domestic gas supplies of 4.5 bcf/d in 2022, the end result will be lower net exports from Canada next year, leaving more gas available in Western Canada and blunting Alberta storage withdrawals this winter (and inflating storage injections next year).
We expect that Alberta will be the only region in Canada to register positive gas demand growth in 2022, coming in at a gain of 0.3 bcf/d, but less than our anticipated supply gain for Western Canada production.
Moreover, though not charted in this discussion, the U.S. EIA also expects U.S. LNG exports to grow a more modest 1.4 bcf/d in 2022 (versus a forecast of 3.2 bcf/d growth in 2021), much less than its forecast for domestic supply growth. This will leave more gas in the US market for its own consumption and storage rebuild in 2022.
Though not deliberately trying to place a price bearish spin on the current extraordinary natural gas market and its multi-year price highs with the above discussion, our point here is that emerging trends in North American natural gas fundamentals may be running against the grain of what has become a very price bullish market as the current heating season gets underway. The one thing that we have learned over the years of following the natural gas market is that there is almost never such a thing as a “sure thing.” Bullish gas price sentiment (or bearish) does not translate into sustained bullish (or bearish) price trends that far into the future.
To demonstrate this, we have plotted the cash price of AECO indexed to 100 at the start of each of the past seven heating seasons (November 1) through to just past the mid-point of the subsequent injection season (end July). AECO prices did show some volatility relative to the starting point, but in nearly every case trended lower (values less than 100) compared to where they had started at the beginning of November. Although the injection seasons of 2017 (pink line), 2018 (green line) and 2019 (black line) were heavily influenced by various pipeline flow issues which contributed to weak AECO prices in each of those summers, the more restriction-free injection season of 2020 (red line) saw little in the way of material price improvement, while prices this year (blue line) had shown improvement by July (and have done so since).
What we conclude is that most of the time, prices over the course of the heating season and subsequent injection season rarely see a sustained gain compared to where they started — the general trend is flat to down. Hence, the historical price trend appears to be on the side of our mid-case price scenario with an average price that is lower, but still historically strong, compared to current price levels.
Ultimately, the bearish or bullish nature of gas prices in 2022 is going to be highly dependent on numerous supply-and-demand factors, not the least of which is the severity of the upcoming winter and the extent of gas storage withdrawals in Alberta and elsewhere in North America. Bullish gas markets have been short-circuited many times by a warmer-than-average winter, while a colder-than-average winter (at least two of which are captured in the above chart) has not translated into a sustained upward bias for prices.
Finally, even with gas prices that might trend down to some degree over the coming winter, RBN’s mid-price scenario for 2022 still looks very promising and could be the best average AECO price seen since 2014, and perhaps the best since 2008. The Canadian natural gas industry is also on much firmer footing heading into next year, with debt levels rapidly falling, earnings, share prices and production levels rising, and a nea unprecedented commitment by producers to capital discipline by holding spending to well within expected cash flows.
With Western Canada’s pipeline infrastructure set for additional expansion in the next few years, and exports via the LNG Canada site by 2025, the start of this winter just may be the beginning of several more years of very strong prices and strong activity for Canadian natural gas producers.