Balmy temperates, robust production sink natural gas prices

Cheap natural gas prices are providing some welcome relief on utility bills as Canadians heat their homes this winter, and prices are expected to remain low for much of this year.

For the natural gas industry in Western Canada, it's a return to low commodity prices after a few years of increased profits.

Natural gas is selling for about $2.09 per million British thermal units (mmBTUs) compared to more than $7.50 in 2022.

At the beginning of this winter, natural gas production was high and storage levels in Western Canada were at record levels. The mild winter has resulted in much less demand for natural gas to heat buildings. Even a brief stretch of intense, bitterly cold weather in January did little to lower storage levels.

For natural gas producers, profits are taking a hit.

"They're kind of gritting their teeth, wringing their hands and hoping for the best," said Martin King, a Calgary-based senior analyst with RBN Energy.

The expected completion of the LNG Canada export terminal in British Columbia in the middle of this year is providing some level of optimism in the sector, said King, although the impact on pricing is hard to predict.

"That might be enough to kind of shift market balances and improve prices," said King. "But that is a very untested idea, nobody's really quite sure."

In the United States, prices are also low because of the warm winter weather and relatively high production levels. A closure at an LNG export facility in Texas is reducing the amount of natural gas that can be shipped to international markets.

U.S. natural gas prices will have to trudge through a tough year ahead as prices are expected to stay low throughout 2024, said Christopher Louney, a New York-based commodity strategist with RBC Capital Markets. Louney is forecasting prices to improve in 2025 once construction of new LNG facilities is completed.

"I think producers are certainly looking out towards next year instead of this year, which does continue to be a struggle," he said.

Natural gas is not a major factor contributing to inflation, but economists say the drop in commodity prices should help. Not only is there savings for consumers, but for many other industries, such as the manufacturing sector.

Canadian natural gas prices this month are down about 25 per cent compared with one year ago.

"Anything that acts to help bring inflation downward is going to be warmly received by the central bank and makes it more likely that the central bank could cut interest rates sooner rather than later," said Craig Alexander, a former chief economist with Deloitte and TD Bank.

Natural gas prices can be volatile and influenced enormously by weather conditions, said Alexander. Still, considering the robust amount of production and high storage levels, he said it would take a prolonged period of frigid temperatures for prices to change noticeably.

In Alberta, the provincial government is already facing a drop in resource revenue compared to previous years because of the drop in oil prices in recent months. A decrease in natural gas prices could make it tougher for the government to unveil a balanced budget next month.