Natural Gas Not As Affected By Oil Price Drop

Natural Gas Not As Affected By Oil Price Drop

For years, the prices of oil and natural gas have been heavily correlated, as the production of natural gas in Canada comes as a by-product of oil extraction.
April 28, 2020

For years, the prices of oil and natural gas have been heavily correlated, as the production of natural gas in Canada comes as a by-product of oil extraction. In more recent times, fracking has enabled markets to be flooded with supply of both commodities, dropping prices across the board. Modern price peaks occurred in 2008 for both oil and gas, with subsequent drop-offs as the financial crisis developed, with oil recovering move favourably that gas. Since then, with the exception of an oil price drop in 2015, both commodities have trended relatively flat over the past 5 years. Now with a double whammy of a global pandemic cutting demand abruptly, and a price war between Saudi Arabia and Russia, the price of oil has plummeted, with it even dipping into the negative territory in different parts of the world in the past few weeks. Canadian natural gas has not seen the same price change, a small silver lining to the Alberta natural gas producers, who are already suffering from a drop in demand and price on the oil side of business.

 

One aspect of the natural gas industry that is showing signs of stress is the up-and-coming Liquid Natural Gas (LNG) market. The ability to supercool natural gas down to temperatures that allow for economical transportation via ships was a revolutionary concept that many of the worlds largest producers were pouring billions of dollars in investments into. It seemed the answer to North America’s key issue with subdued natural gas prices: global level supply, but with no access to global markets. With the implementation of LNG, producers in Alberta would be able to ship their product to higher cost markets, like China, where natural gas was expected to sit at $10-12/Gj, much better than the $2-3/Gj Canadian natural gas prices. This price difference was expected to lift North American prices up to a more sustainable $5-7/Gj threshold, that would see producers profiting from their natural gas production.

 

With the supply of natural gas in Saudi Arabia and Russia plummeting along with their oil, China has been stocking up on the cheaper natural gas from these cheaper sources. This is expected to impact the global LNG movement that North American producers were hoping to tap into. This development, paired with the Canadian Federal Government’s apparent decision to reduce support for the development of LNG infrastructure as it attempts to become more in line with carbon emission reductions, has stalled LNG for the time being. An initial 5 year projection from 2018 to full production capabilities has been hampered again and again, pushing back profitability timelines to the point where several producers have cancelled projects altogether.

 

While Canadian natural gas prices are not dropping as dramatically as oil, the impacts of this price drop could have long terms effects on the price of natural gas as global factors become more prevalent. Canadian Energy Strategies monitors energy markets and developments, like this one, to best serve our customers. We use this information to make better projects at short and long term pricing of Canadian natural gas, which allows us to make informed decisions, maximizing our clients’ savings. For more information about the strategies that we implement, and how we have been using them to save our clients money on energy costs for over a decade, please send an email to lclimenhage@ces-energy.com.

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