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One of the first rules
most analysts adopt early in their careers is never to give a price and
a timeframe in the same sentence. As many readers are well aware, I do
not shy away from making predictions about the direction of energy or
currency markets and the timeframe in which these predictions will be
met. In the October 2003 issue, I
predicted that natural gas prices had hit their seasonal lows and were
set to spike to over $10US during the winter. Well, winter has come and
gone and we did not have a spike to over $10US.
(December’s price surge only lifted prices into the $7.00US
range.) I did, however,
manage to accurately predict that natural gas prices would turn sharply
higher at a time when nearly all analysts were predicting that they
would wallow in the low $4.00US range due to high storage levels.
I bring this past prediction to your attention because the
evidence that supported my prediction of a price spike last winter is
even stronger today.
In
this month’s issue I will examine the four reasons behind my thesis
that we have entered a “new era” of natural gas pricing and what it
means for investors. While I hate
the phrase “new era” and all the ugly connotations associated with
it, I could not think of better way to describe the sea change that I
see taking place.
1)
Canadian production continues to fall.
According
to the data provided by Natural Resources Canada in the below table,
Canadian natural gas production has had a precipitous fall off in recent
months. (In all of the below tables I have used data for the most recent
12 months currently available.)
Canadian Natural Gas Production (BCF)*
|
Month
|
Current
Year
|
Prior
Year
|
%
Chg vs. Prior Year
|
|
Dec
2002
|
557
|
518
|
8%
|
|
Jan
2003
|
548
|
538
|
2%
|
|
Feb
2003
|
488
|
482
|
1%
|
|
Mar
2003
|
529
|
546
|
-3%
|
|
Apr
2003
|
488
|
512
|
-5%
|
|
May
2003
|
476
|
495
|
-4%
|
|
Jun
2003
|
460
|
477
|
-4%
|
|
Jul
2003
|
487
|
493
|
-1%
|
|
Aug
2003
|
481
|
497
|
-3%
|
|
Sep
2003
|
454
|
492
|
-8%
|
|
Oct
2003
|
465
|
514
|
-10%
|
|
Nov
2003
|
485
|
509
|
-5%
|
|
12-Month
Avg.
|
493
|
506
|
-3%
|
|
*Source:
Natural Resources Canada
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What
I find most interesting about the drop in Canadian production is that it
has come at a time of historically
high prices and record drilling activity. The below table contains
the number of Canadian natural gas well completions each month over the
past year and the percentage increase over the same month in the prior
year. Once again, the data is
provided courtesy of Natural Resources Canada.
Canadian
Natural Gas Wells Completed*
|
Month
|
Current
Year
|
Prior
Year
|
%
Chg. Vs. Prior Year
|
|
Feb
2003
|
617
|
406
|
52%
|
|
Mar
2003
|
990
|
1,255
|
-21%
|
|
Apr
2003
|
976
|
725
|
35%
|
|
May
2003
|
771
|
516
|
49%
|
|
Jun
2003
|
789
|
851
|
-7%
|
|
Jul
2003
|
1,089
|
635
|
71%
|
|
Aug
2003
|
1,356
|
621
|
118%
|
|
Sep
2003
|
2,199
|
855
|
157%
|
|
Oct
2003
|
1,447
|
1,389
|
4%
|
|
Nov
2003
|
1,177
|
673
|
75%
|
|
Dec
2003
|
1,605
|
910
|
76%
|
|
Jan
2004
|
1,659
|
800
|
107%
|
|
12-Month
Avg.
|
1,223
|
803
|
52%
|
|
*Source:
Natural Resources Canada
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The
drop off in Canadian production is having a significant impact on
Canada’s natural gas exports to the United States.
After 16 years of growing natural gas exports to the United
States, 2003 witnessed a dramatic decline in exports.
I fully expect this trend to continue.
The table below contains data from the US Department of Energy
and clearly displays the trend of declining Canadian natural gas
exports.
US
Natural Gas Imports from Canada (MCF)*
|
Month
|
Current
Year
|
Prior
Year
|
%
Chg vs. Prior Year
|
|
Nov
2002
|
308,220
|
283,035
|
9%
|
|
Dec
2002
|
348,952
|
293,640
|
19%
|
|
Jan
2003
|
332,695
|
334,481
|
-1%
|
|
Feb
2003
|
285,984
|
297,548
|
-4%
|
|
Mar
2003
|
292,371
|
322,445
|
-9%
|
|
Apr
2003
|
272,272
|
297,903
|
-9%
|
|
May
2003
|
270,075
|
291,312
|
-7%
|
|
Jun
2003
|
252,740
|
292,178
|
-13%
|
|
Jul
2003
|
261,582
|
323,240
|
-19%
|
|
Aug
2003
|
260,657
|
331,839
|
-21%
|
|
Sep
2003
|
243,019
|
318,707
|
-24%
|
|
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Current
Year
|
Month
|
%
Chg vs. Prior Year
|
|
Oct
2003
|
274,789
|
316,006
|
-13%
|
|
12-Month
Avg.
|
283,613
|
308,528
|
-8%
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*Source:
US DOE
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