Record levels of natural gas in storage entering the new year could see batteries being shut down next year by Canadian producers struggling to find a home for the over-abundant resource, according to FirstEnergy Capital Corp.
November alone saw the largest inventory jump for the month in Western Canada's history, a 9.4 billion cubic feet pumped into storage during a month traditionally considered the start of the heating and withdrawal season.
Without a prolonged blast of frigid weather to draw up heating demand, natural gas prices will have little recourse from the scourge of high storage by spring, said analyst Martin King Monday in the storage update.
"The likelihood of full storage well ahead of the end of the 2012 injection season and a lack of significant export opportunities to the United States may create extremes of price weaknesses for (bench-mark hub) AECO and wide-spread production shut ins during 2012," he said.
This year's injection season of March to October saw the largest cumulative gain on record, 311 bcf, storage levels bursting at the seams, mild weather reducing heating demand, and strong U.S. supply spell a tough year ahead, King said.
The current heating season has proven to be something of a dud so far, with half the volume of natural gas being pulled out of storage as last year. Without a significant in-crease in demand from key markets over the next month, there will be a substantial year-over-year surplus.
Natural gas prices at the Alberta storage hub have dropped 23 per cent this year on reduced demand, falling to $2.82 per gigajoule Monday.
Futures have lost 30 per cent this year. The January contract settled at $3.01 US per million British thermal unit in New York Monday on forecasts of unseasonably high temperatures continuing in major consuming markets.
Encana Corp., Canada's largest natural gas producer, remains tight-lipped about its plans for 2012, although more than half of its production is hedged, said spokesman Alan Boras.
The Calgary-based company produced approximately 3.37 billion cubic feet per day of natural gas during the third quarter, he said. The number could change in 2012 when En-cana has 2 bcf per day production hedged at $5.80 per thousand cubic feet, Boras noted.
Natural gas production in Canada has been sliding for the past five years on a combination of aging fields and low prices resulting from rising U.S. shale gas production.