Issue 3, 2018

Trends in natural gas commodity prices

Over the past three decades the North American natural gas market has seen three distinct pricing periods (top chart). From 1990 to 2000 prices rose at a very moderate pace driven by steady increases in demand.  From 2000 to 2010 perceived supply shortages and the influence of strong oil prices drove natural gas prices up sharply and added volatility to the market. However, from 2010 to present day, strong gas supply growth has pushed market prices down even as demand continues to increase.

In general, a consistent reversion to low price levels, driven by ever increasing supply, has been the norm over the last decade.  The market has regularly responded to the machinations of supply and demand, be they transitory or concrete.  Looking at Canadian gas utilities we see their commodity charges have followed markets (middle chart), delivering the benefits of lower market prices directly to consumers.

In the most recent years we see that natural gas prices are “bumping along the bottom” (lower chart).  This is great news for the millions of Canadian homes and businesses that rely on natural gas as their primary energy source – and helps explain why the desire for natural gas continues to increase.  For Canadian natural gas producers this reality is less cheerful as low prices and abundant supplies have eroded their margins and placed stress on their financial bottom line.  In fact, strong supply in Canada has led prices in Canada to drop below their US benchmark.  The silver lining for producers is that low prices are triggering more demand growth.

The history of energy products in Canada and indeed North America has been one where new, innovative energy forms have entered the market and, in some cases, taken over.  Most of these situations new entrants providing better energy services at lower prices.  This pattern has seen coal replace wood and oil replace coal.  Now natural gas is replacing all three, and in some industries/regions has also been pushing out electricity, largely on the back of its affordability.

Going forward natural gas is expected to remain the low cost preferred energy source in Canada given its proven ability to stay relevant to the needs of consumers and to deliver reliable, clean, affordable energy services.