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)*

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*

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)*