AECO (Alberta Energy Company) gas prices will recover. It's simply a matter of time. Despite the widely talked about storage concerns, AECO spot prices recovered above C$2/mcf yesterday.
(If you want one-day delayed AECO gas price updates, click on this link here.)
Canadian gas imports rose once again to 6.2 Bcf/d now. As we wrote in our article here, Jefferies assumption that Canadian gas imports were going to drop to 4.6 Bcf/d is absolutely ridiculous. They also made wild assumptions like zero LNG exports, which is even more insane.
As you can see from the first chart, the basis differential between Henry Hub and AECO is still wide at C$1.49/mcf or $1.167/mcf. We wrote before that the transportation cost is usually $0.75/mcf, so any basis differential above that will incentivize traders to import Canadian gas.
As long as the basis differential is above $0.75/mcf, Canadian gas exports to the US will remain high around 6 Bcf/d. This is solely due to the record storage we are seeing in Western Canada where storage is 89.1% full. We think over the course of the summer, Canadian gas exports will need to rise to 6.5 Bcf/d if Western Canada wants to see storage levels below capacity. Many of the Canadian producers we follow are already delaying capex plans towards the end of the year, so production should start to fall. This could likely result in very minimal builds over the next several weeks in Western Canada, and that will further help AECO prices.
Basis differential will likely remain until the storage issue goes away. A cold winter will be enough to exhaust a lot of the surplus, and basis differential should return to $0.75/mcf.
We don't think the basis differential is structural. You can read more about why here.
Overall, recent price strengthening has helped many of the Canadian gas producers we own in the HFI portfolio. As the market continues to rebalance, we think the Canadian gas producers have more leverage to a recovery in natural gas prices.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.