Natural gas prices strengthening

CALGARY — Natural gas prices spiked more than 13 per cent on Monday, amid expectations that some balance may soon return to the oversupplied North American market.

CALGARY — Natural gas prices spiked more than 13 per cent on Monday, amid expectations that some balance may soon return to the oversupplied North American market.

On the New York Mercantile Exchange, natural gas prices settled 33.7 cents higher at US$3.297 per 1,000 cubic feet.

Prices have been dragged down recently from both the supply side and the demand side.

New resource plays in the United States, like the Haynesville region in Louisiana and the Marcellus area in Pennsylvania, are estimated to contain enormous amounts of natural gas.

Meanwhile, the recession has eaten away at demand for natural gas, especially manufacturers.

In the past natural gas has traded in tandem with crude oil, but lately that has not been the case.

On Monday, crude for October delivery fell 43 cents to settle at $68.86. On Friday, the contract tumbled $2.65 to settle at $69.29.

In a report Monday, CIBC World Markets said it was taking a cautious tone toward natural gas prices for the remainder of the year, as storage levels remain at record highs.

However, the picture is expected to improve in the early part of next year, the bank said in its natural gas update.

“Although excess storage is expected to remain an overhang for natural gas prices in the near term, we foresee the potential for U.S. lower 48 storage to return to more normal levels,” the report said.

Meanwhile, drilling in Western Canada has been dropping for 28 straight months to the lowest levels since 2000. So far this year, production is 5.6 per cent lower than 2008.

The decrease in excess storage will be due to a continued decrease in U.S. domestic production, stronger industrial demand as the U.S. economy improves and completion deferrals and production shut-ins toward the end of this year.

The number of natural gas rigs working on working in the United States was down 59 per cent at this summer compared to a year ago.

However, the drop has not made a significant dent in production because the areas being drilled — shale gas plays like Haynesville in Louisiana — are so prolific.

What could have a more meaningful impact are the production curtailments, shut-ins and deferrals companies are undertaking in the face of low natural gas prices.

Toronto-area energy firm Epsilon Energy Ltd. (TSX:EPS) cut back on some of its production from wells in Pennsylvania earlier this month, but announced Monday it was going to start ramping up that activity.

“With natural gas prices recently dipping below $2.00/mcf and rebounding to $3.00/mcf, management believes it is now prudent to increase its operated natural gas production,” chief executive Zoran Arandjelovic said in a statement.

On the demand side, CIBC expects industrial use to fall by 1.7 billion cubic feet per day in 2009 from a year ago. How it fares in the future will depend largely on how the U.S. economy recovers.

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