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By Scott DiSavino
June 9 (Reuters) - U.S. utilities and merchants are
embarking on their biggest buying spree for Canadian natural gas
since the start of the U.S. shale boom, taking advantage of
record low prices and raising concerns about the U.S. industry's
deepening crisis.
Traders have been scooping up more gas from Canada, the
world's fifth largest producer, in recent months after prices at
the AECO hub in Alberta sank to a big discount to the U.S.
benchmark.
With some analysts expecting the arbitrage to remain in
place through the summer and traders having booked long-term
pipeline deals, the shipments could last longer than previously
expected, experts warn.
The deals will feed growing consumption from power
generators after a record number of coal plants retired last
year. In addition, gas demand is rising as the United States
exports more gas to Mexico via pipeline and ramps up exports of
liquefied natural gas to the world, traders said.
The scramble has also offered loss-making Canadian drillers
a chance to continue pumping out product as domestic tanks
continue to fill up and prices languish near record lows.
But market experts worry the surprisingly strong imports
could prolong the U.S. market's biggest rout in a generation,
adding to the ballooning glut after a warm winter left Canadian
and U.S. storage facilities at record highs.
"We're still pulling too much supply out of the field," said
Martin King, an analyst at Alberta energy advisory FirstEnergy (NYSE:FE)
Capital.
Now analysts expect Canadian imports to the United States to
rise this year for the first time since 2007 when growing output
from U.S. shale fields like the Marcellus in Pennsylvania
started to displace Canadian fuel.
Some traders and producers have booked deals for as long as
one year to ship product to the U.S. Midwest on TransCanada
Corp's TRP.TO Mainline pipeline, said Keith Barnett, head of
fundamental analysis at ARM Energy in Houston, a big U.S. gas
marketer.
The Mainline runs from Alberta to Quebec and connects with
several pipelines capable of moving Canadian gas to the U.S.
Midwest.
SCRAMBLE FOR A HOME
The need to find homes for surplus Canadian gas became more
urgent last month after wildfires knocked out half of the
nation's oil sands production capacity, curbing demand for the
fuel. Oil sands producers use large amounts of gas to produce
power and steam to cook the oil sands to produce crude.
Prices in Alberta, where two-thirds of Canada's gas is
produced, fell to around 50 Canadian cents per thousand cubic
feet, the lowest on record, in mid May.
Prices have since recovered to about C$1.50 this week due to
the return of some oil sands operations as the fires recede, but
AECO prices remain the lowest cost option for many U.S. regions.
Most analysts expect prices at the U.S. Henry Hub
GT-HH-IDX benchmark to average about $2.28 per million British
thermal units in 2016. So far this year, the hub has averaged
only $1.96, the lowest annual start since 1999.
Canada's exports fell to about 7.4 bcfd in 2015, their
lowest since 1994, according Canadian and U.S. federal energy
data.
Since the start of this year's storage injection season in
April, Canada has exported about 400 million cubic feet per day
more gas to the United States than last year.
While Canada is expected to produce about 15.1 bcfd in 2016,
about the same as in 2015, that is far in excess of the 10.1
bcfd needed domestically.
With storage tanks 74 percent full last week, drillers are
under increasing pressure to sell south.
"Gas imports from Canada ... continue to be a source of
worry for our calls of a continued (U.S.) market recovery in the
second half of 2016," analysts at Morgan Stanley (NYSE:MS) said in a
recent note.
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U.S. vs. Canadian natural gas prices http://tmsnrt.rs/1PeHYl9
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