Hot summer temperatures could lead to natural gas price appreciation

CALGARY — An uptick in natural gas prices caught some commodities analysts by surprise this week, as higher temperatures and more demand for gas fuel bullish calls for the commodity.

“We have been positively surprised by the relative strength of (Alberta) prices in the past week to 10 days,” FirstEnergy Capital Corp. vice-president, institutional research Martin King said in a Tuesday note, after AECO natural gas prices climbed above $2 per thousand cubic feet.

AECO prices haven’t risen above $2 since the first quarter, largely as a result of a warm winter in North America, leading to less demand for natural gas to heat homes.

However, King pointed out that hot summer temperatures are leading more consumers to switch on air conditioning units, at the same time as utilities are burning more gas and less coal for electricity.

“Sustained price strength will be a function of continued hot weather, Alberta demand and how quickly Alberta gas storage begins to reach physical (storage) capacity limits,” he said.

Though AECO prices climbed above $2 per mcf, Western Canada-sourced gas still faces a steep discount relative natural gas in many U.S. markets.

NYMEX gas prices, for example, climbed two cents Tuesday to close at US$2.76 per mcf.

The discount, however, is leading to additional volumes of relatively cheaper Canadian gas exports to U.S. markets. King said the pricing dynamics “can be seen in the latest net export data where Canadian gas flows to the U.S. have hit their highest level for this time of year in six years.”

At the same time as Canadian gas prices have been rising, hot temperatures in the U.S. have led to a rise in gas prices south of the border.

Raymond James analyst Jeremy McCrea said in a recent note that “gas demand continues to track above historic norms while gas supply continues to roll over.”

Utilities across North America are burning more gas for electricity as coal-fired power plants have been or are being retired. At the same time, hot temperatures in important U.S. markets has led to increased use of air conditioners, necessitating more power.

“With coal retirements (and a few nuke retirements) far more prevalent this year than at any point in the past, the generation stack has had little choice but to turn to increasing amounts of gas-fired generation, both efficient and inefficient units, to meet the power loads,” King said in a note.

Financial Post

gmorgan@nationalpost.com

Twitter.com/geoffreymorgan

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