Thoughts on Natural Gas

Natural gas has hit the lowest price in 10 years!

Listening to the news this morning, I heard natural gas futures slipped another 5 cents. Checking the quotes now on Bloomberg, the spot rate is down over 15 cents. With spot prices hovering around $2.81 spot and $2.73 for futures, what does this mean? Should we even care that prices are down more than 10% this week alone?

Since yesterday, the decline in futures has been 1.5% and decline in the spot rate 5.7%. This is after an almost 6% decline the day previous. Despite the fact that natural gas rates tend to rise in the winter (heating bills for households etc), supplies have been greater than anticipated. Further with all the shale finds... well we all have gas (we as a lot of the countries in the world), and we have a lot of it.

Chinese, French and Japanese energy explorers committed more than $8B in acquisitions to shale-rock formations in the US at record prices within the last three weeks. The supply side is a rockin', however producers are weary not to produce too much and a lot of times sit on their natural gas reserves in order to not drive down gas prices too far. M&A activity is anticipated to continue as certain companies find shale a good opportunity to secure resources for the future.

Here in Canada, we are heavily energy based (think oil, think Alberta... they have a lot of gas too). Canada is the third-largest producer and exporter of natural gas. Canadian Natural Resources lost 2.6% off its share price as natural gas declined on Wednesday. Further, TransCanada Corp., the owner of the country's largest pipeline decrease almost a percent. Trilogy Energy Corp., a western Canadian gas and oil producer shaved 8.1% off its share price yesterday. Our largest gas producer, Enbridge is down 1.7% today.

Producers since 2005 have been steadily increasing production (up 50% since 2005 in the US alone). The ramp up of production means that they're basically giving away the commodity.

We have significant businesses that will profit from using cheaper natural gas inputs (fertilizers etc), however gas pipeline companies, natural gas exporters and producers, as well as in the LNG space may face hardships if the natural gas price continues to plummet - where is the bottom? So our dearest TSX that dropped 11% in 2011, may continue to face hardships as the current concerns in the US, Euro and especially China puts commodity prices under pressure. This affects our companies and our dollar.