LAS Natural Gas Program Update
Natural Gas Market Commodity Commentary
For the first quarter of 2020, natural gas spot market prices averaged 7.3 ¢/m³, a decrease of 1.6 ¢/m³ compared to the fourth quarter of 2019. The drop in natural gas prices through Q1 was mainly a result of above normal temperatures to round out the winter. With limited heating demand this year, natural gas prices remained relatively low/stable.
Market conditions could have been a whole lot worse for us if Mother Nature wasn’t on our side, especially when Western Canadian natural gas inventories entered the winter at 15-year lows. Looking ahead, plummeting global oil markets as well as the ongoing spread of the COVID-19 pandemic have been taking their toll. Fear and uncertainty have sent future markets into panic mode, with no real direction on how long this will last or the extent of the impact.
Supply & Demand
With oil prices plunging due to the potential supply surplus caused by COVID-19 and the ongoing price war between the Saudis and Russia, there is fear that global cut backs in oil production will ultimately affect the associated gas that is produced in North America, thus putting upward pressure on natural gas prices. The plunge in global crude oil prices is unlikely to show an immediate impact on associated natural gas production, but if sustained it could hold domestic output slightly lower this year. North of the border, about 25 Canadian oil producers have announced major cuts to 2020 production since the global collapse.
In addition to the impact of global oil and associated gas impacts on the price of Canadian natural gas, the impact that COVID-19 has had on the economy has in turn significantly weakened the Canadian dollar, at times trading below $0.70, which has put upward pressure on Canadian natural gas prices as well. As North American natural gas prices are set on the New York Mercantile Exchange, in US $/MMBtu, this can represent a risk for Canadian end users as typically a 1 ¢ decrease in the value of the CAD $ versus the US $ can translate into a 4 ¢/GJ increase in the price of natural gas paid by Canadians end users.
However, with many businesses scaling back usage or shutting down operations all together in response to controlling the spread of COVID-19, this may in turn cause a decrease in overall natural gas demand. Since we are now heading into the shoulder season where typically we see very little heating or cooling demand, these elements have essentially been keeping the day and short-term markets in check.
Keep in mind that after a much milder winter, natural gas inventories are at good levels. In the West where we were dealing with an extreme storage deficit to start the winter, we have now gained significant ground and are only 7% behind historical levels. In the East, natural gas inventories are well ahead of historical levels due to the limited demand this past winter. These storage levels have really moderated natural gas prices. Most of the upward pressure from COVID-19 and low oil prices for the most part has been concentrated to the forward markets given the current uncertainty surrounding how the crisis will eventually pan out.
The LAS Natural Gas Program price is currently set at 9.4 ¢/m³ for the Nov 19-Oct 20 contract year. Even with the recent bump up in future natural gas prices as a result of COVID-19 and the global oil collapse, based on the hedges currently in place, the LAS program is still well positioned to recognize relatively flat year over year pricing for the coming years. Prices are subject to change based on changing market conditions and additional fixed layers added to the portfolio.
Natural Gas Market Transportation Commentary
For the Nov 20-Oct 21 contract year, LAS has secured 75% of its deregulated transportation obligations, which represents a significant cost savings compared to current rates. Transportation prices in the forward market remain relatively flat, and LAS members will continue to benefit from this in the year over year program price.