People tend not to worry about natural gas prices during the summer. This is mostly because natural gas has been consumed during the winter for heating purposes. Summer consumption has historically been lower than winter consumption. Prices in the summer have tended to be less volatile.
Over the last several years however, more consumers are using natural gas during the summer. Many jurisdictions have turned to natural gas instead of coal to fire their power generation. The industrial sector has found an increasing number of uses for natural gas in their production processes. It’s a growing possibility natural gas prices could rise over the summer season as well as in the winter.
Demand is one part of the overall natural gas equation. Supply and availability are other reasons why natural gas has become widely adopted as a fuel source in the last 10-15 years. Shale gas drilling throughout North America has tapped into previously inaccessible formations. Rapidly expanding supply has caused prices for natural gas to plummet. These new supply sources are closer to markets than traditional sources. Lower transportation costs have helped increase the use of natural gas.
What can be expected of the Canadian gas market in the near term and beyond?
The reference price for Canadian natural gas is termed AECO. AECO is related to physical delivery and pricing in Alberta.
Gas supply, markets and pipelines in eastern Canada and eastern United States have expanded rapidly. To some extent, western Canadian gas has been left high and dry. Eastern production points, close to the large populations that consume the gas, have much lower delivery costs. AECO gas has essentially been stranded.
To be competitive, AECO natural gas is generally sold at a discount to make up for the relatively high transportation costs to eastern markets. As a result, the price for AECO gas generally only spikes when demand in the west is consistently strong. Typically, western demand is strong when winter heating load is high. Western Canadian summers are drier and cooler than elsewhere. Their demand for air conditioning from natural gas fired electricity tends to be lower than the gas demand for winter heating. The likelihood of AECO price spikes is therefore lower in the summer than in the winter.
