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Schork: Springtime in Canada—Bullish or Bearish for NatGas?

In the weeks ahead the market for natural gas in Canada will transition to the spring breakup. To this effect, Canadian rig counts (Baker Hughes or BHI) will peak in the next couple of weeks for the onset of the spring thaw. This is the seasonal downturn in rig counts which historically begins in early March, depending on weather conditions, and lasts through late April.

As temperatures in Canada’s oilpatch moderate and the ground softens, rig activity declines as drillers scale back to minimize environmental spoilage, i.e. road bans that prevent the movement of equipment between well sites will go into effect towards the end of this month. This event also marks the end of the peak drilling season in Canada as sites in the marshy areas of northern Alberta are only accessible in the winter.

In a typical breakup the count falls by 80%. Over the previous ten seasons, rig counts in January and February typically peaked in between 531 and 640. The highest count occurred in 2006, 727, the lowest, 438, in 2009, as the bear market in North American gas ramped up.

In the breakup months of March and April the count normally bottoms in between 140 and 90 rigs or in between 23% and 16% of the pre-breakup peak. More importantly, as far as supplies go, imports from Canada into the Lower 48 U.S. drop from in between 11.05 to 10.49 Bcf/d in the lead into the breakup down to 10.08 to 9.50 Bcf/d through the breakup per metrics from the last ten seasons.

Bottom line, through the first eight reports of 2001 the rig count in Canada is showing a high of 637. If we assume the drop through this breakup falls in accord with seasonal parameters, then in early May the count will be somewhere in between 149 to 101 rigs. Is that bullish or bearish?

Your guess is as good as the UNG’s. That said, last night spot Nymex gas for April delivery settled at a 15% discount to the following April (2012). Comparatively speaking, this spread is 66 bps less dear than a year ago. In other words, we might be in store for a material decline in Canadian rig activity, but be that as it may, the forward curve on the Nymex is showing little concern in regard to the future availability of supply.

That sounds pretty bearish to us here at The Schork Report. Nevertheless, because we tend to be donkeys in such cases, we will maintain our nearby bullish bias.

C’est la vie.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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