Winter Projection: Robust Supply, Higher Natural Gas Prices in Canada

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Canadians can expect to pay more for natural gas this winter, but supply will be plentiful, according to the country’s National Energy Board (NEB).

Despite abundant supply and storage, a seasonally normal winter weather forecast and a slow growing North American economy, the NEB’s Winter Energy Outlook projects natural gas prices this winter to be higher than they were last winter due to higher demand.

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Prices in Alberta are expected to range between $2.75 and $3.25 per gigajoule, while prices at Henry Hub in the United States are expected to average between $3.50 and $4 USD per million Btu. However, this winter’s record storage volumes could place downward pressure on natural gas prices.

Production increases in the United States and an unseasonably warm winter last year resulted in a large storage overhang and 10-year low prices this spring. In response to these low gas prices, demand for gas from the U.S. power generation sector has increased considerably, resulting in a narrowing of the balance between supply and demand by mid-2012.

As of late October, North American natural gas storage was 4.62 trillion cubic feet (tcf), surpassing last December’s storage volume of 4.54 tcf. Compared with the five-year average volume for late October, volumes of natural gas currently stored are 8 percent higher.

Falling commercial inventories in the United States, Japan and Europe, heightened geopolitical pressures in the Middle East, lower forecasts for global economic growth and growing supply in countries not affiliated with the Organization of the Petroleum Exporting Countries (OPEC) are affecting crude oil prices.

However, the NEB believes that these factors are balanced and, as a result, West Texas Intermediate (WTI) prices will average between $85 and $95 USD per barrel this winter. Brent, the North Sea benchmark crude, will continue to trade at a high premium to WTI and will average between $110 and $120 USD per barrel this winter.

With the onset of winter, demand for heating oil returns and consumers can expect to pay prices slightly higher than they did last winter. Planned and unplanned refinery outages in the United States have affected petroleum product supply as distillate inventories in the U.S. Northeast have declined well below the five-year low. However, weather forecasts for a mild winter in the Maritimes may result in lower demand for heating oil. The average heating oil price in Canada, including taxes, is expected to average between $1.15 and $1.35 per liter this winter.

As a result of U.S. refinery outages in the autumn, including the aftermath of Hurricane Sandy and low inventories in the United States, Canadians can expect to pay slightly more for their gasoline this winter. The national average retail price for unleaded gasoline is expected to average between $1.20 and $1.40 per liter.

The NEB anticipates that domestic electricity markets will have adequate supply this winter. New gas-fired generation and wind capacity will be added towards year-end in Alberta, and two units at the Bruce nuclear plant in Ontario have resumed service this fall, increasing supply in both provinces. Prices this winter in the wholesale markets of Alberta and Ontario are expected to remain below the five-year average, averaging between $80 and $90 per megawatt hour (MWh) and $27 and $37 per MWh, respectively.

Electricity rates in other parts of Canada will vary from province to province as multiple jurisdictions have already, or are planning to increase electricity rates. Common reasons behind applications for rate increases include replacement of aging infrastructure, inflation and higher cost of newly contracted generation.

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