Natural gas storage levels are bad news for bulls

A recovery in oil prices this month has the market more bullish with an energy sector recovery, but for gas, that bullishness might be premature.

Reserves of gas in Canada have now hit the greatest level on record with this season, surpassing levels seen during the previous peak in 2012. FirstEnergy Capital Corp., a power investment bank, asserted the gap with 2012 has become “widening each day,” signalling affordable prices ahead.

It is a worrying trend, because cold temperature has become behind the marketplace, leaving less demand inside a market oversupplied with natural gas.

“The very mild weather recently has resulted in overall Canadian natural gas storage levels having risen previously week to a record high for this time of year,” said Martin King, analyst at FirstEnergy Capital.

Like crude, gas has seen the market flooded with excess supply due to the development of horizontal drilling technology and hydraulically fractured shale. Even though oil prices have spiked this month, mainly because of signs that oversupply in the market is easing, there aren’t any signs that the same is coming for natural gas.

The situation is more bleak for Canadian natural gas, particularly with the recent announcement that a major liquefied natural gas project in Oregon was denied a permit last week. The work, the Jordan Cove LNG plant, was seen as an potential outlet for gas produced in the Montney shale region near Dawson Creek, British Columbia.

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“Future outlets for Canadian natural gas supply seem to be shrinking yet again, with the U.S. Federal Energy Regulatory Commission rejecting a pipeline that would have connected Veresen’s proposed Jordan Cove LNG export terminal towards the wider gas grid,” said King.

Data in the Commodity Futures Trading Commission shows that bets against natural gas remain near record levels, suggesting that the market continues to have a really bearish outlook around the commodity.

Natural gas futures have fallen more than 20 per cent this season amid rising reserves along with a surprisingly mild winter. Forecasts throughout March suggest that weather in The united states might find excellent temperatures, dulling hopes that the market could benefit from a late-season cold spell.

King notes that there are signs that some production in Western Canada is easing, with gas directed drilling rigs starting to hit multi-decade lows. That could help tighten supply within the coming months and help prices.

But investors are unlikely to determine a real rally this year. King asserted when 2016 involves a close, supply could reach new record levels in Western and Eastern Canada.

“As things currently stand, we expect this record setting trend to carry on and that 2016 storage levels could well finish at record highs after October both in halves of the country,” he said.

Natural gas futures closed up .92 per cent at US$1.87/MMBtu on the New York Mercantile Exchange.