Canada Natural Gas Discount at Five-Year High as Storage Fills

Canadian natural gas traded at the widest discount to U.S. prices in almost five years as storage levels in western Canada approached capacity.

Regional gas storage reached 469.2 billion cubic feet last week, or 97 percent of the capacity surveyed by energy information firm Canadian Enerdata Ltd. A change in short-term tolls on the country’s largest natural gas pipeline in July increased demand for storage. A boost to exports from flooding in Colorado is ending, said Martin King, an analyst with FirstEnergy Capital Corp.

Gas shipped from the Alberta AECO hub closed yesterday at $1.85 per million British thermal units less than the U.S. benchmark natural gas price at Henry Hub in Louisiana. It was the largest discount since Sept. 25, 2008, according to data compiled by Bloomberg.

“With storage full and people reluctant to send gas down the Mainline because of the higher short-term tolls, plus Colorado production coming back and a lull in demand from the U.S., prices could be weak for several weeks yet,” King said in a phone interview from Calgary.

Prices fell in July after pipeline company TransCanada Corp. (TRP) won approval from regulators to raise short-term tolls on its cross-country natural gas Canadian Mainline System to get shippers to sign up for long-term contracts.

Many producers responded by putting more gas into storage rather than shipping it, though the pace of injections is beginning to slow, said Enerdata President Richard Zarzeczny.

No Room

“I don’t think there’s enough room and they realize they are going to bump up against capacity and the storage operators must be putting some kind of limits on the injection rate,” Zarzeczny said. “The fact that it has nowhere to go is what’s driving the price down.”

Some extra Canadian gas probably went to Colorado as flooding there starting last week shut down local production, King said, although that outlet will disappear as Colorado output returns to normal.

U.S. appetite for natural gas from Canada typically drops at this time of year as lower temperatures mean less air-conditioner use. American demand last year declined by 6.75 billion cubic feet a day, or 10 percent, between July and September, according to data from the U.S. Energy Information Administration.

King said Canadian gas prices could be weak into October, until winter heating demand picks up.

“Once we get some real space-heating demand, then we kind of hit the reset button, storage starts coming down and prices will come back,” he said.

Last year, Canadian storage peaked at 472.5 billion cubic feet on Oct. 20, compared with the maximum of 482.7 billion, according to Enerdata.

To contact the reporter on this story: Edward Welsch in Calgary at ewelsch1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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