Picture: Deviate Art

By Michael O’Neill

The world has gas pains. And it stinks. It’s not the eye-watering, tear-inducing odor associated with the aftermath of National Chili Day (Feb. 24/22) but soaring prices of Natural Gas at home and abroad are making consumers cry.

The benchmark Natural Gas contract (NYMEX NGX1) trades at $6.00 per million British Thermal Units (MBTU) for Henry Hub delivery in Louisiana, USA.  That price is critical for Canadian’s because all domestic production prices are based on the Henry Hub rate. The Canadian benchmark is Alberta’s AECO hub.

But if you think you can simply convert the US dollar price for gas to Canadian dollars just by multiplying the exchange rate, then apply that result to forecast your home heating bill, think again. It is easier to discover how Cadbury gets the caramilk into a Caramilk bar.

Source: Cadbury.ca

The common denominator for Canadian natural gas prices is the Henry Hub price in US dollars per MMbtu (thousand thousand British Thermal Units). Canadian prices are expressed as CDN/Gj or Canadian dollars per gigajoule, which adds a layer of confusion when making comparisons.

Homeowner bills report billable units, which may be in gigajoules like in BC or cents per cubic meter as in Ontario.

But that’s just for the price of gas.

For example, a gas provider such as Enbridge levies a Customer Charge, a Delivery to you charge, and a delivery from the producer to Enbridge charge.

 The federal government gets into the act as well. Greta (“How dare you!”) Thunberg and I are absolutely thrilled to know that the federal carbon tax representing 30% of the customer charge on my monthly gas bill will offset the massive damage from China’s 132 coal-fired, carbon-spewing generators.

If you are not locked into a term contract, the daily NGX price swings will also impact your bill and those swings can be large.  Prices soared in September, just in time for winter.

Source: Saxo Bank

The steep rise in gas and oil prices has roiled global equity markets in the past few days. Traders fear that inflationary pressures from the rapidly rising prices will force central banks to raise rates ahead of schedule, which sank stocks and boosted US10-year Treasury yields to 1.57% from 1.47% this week.

The energy price increases certainly influenced the Reserve Bank of New Zealand’s (RBNZ) monetary policy decision on October 6. The RBNZ became the second major G-10 central bank to raise rates since the start of the pandemic. The RBNZ increased their Overnight Cash Rate (OCR) to 0.50% from 0.25%, acknowledging a higher inflation forecast “accentuated” by rising “oil prices and supply shortages that risk leading to more generalized price increases.”

The Bank of Canada (BoC) policy statement said above-target inflation was boosted by supply bottlenecks and gasoline prices but admitted concern about their magnitude and persistence. The energy component of the Statistics Canada CPI report showed that electricity, natural gas, fuel oil, and other fuels rose 20.7% y/y in August.

The BoC should be concerned about rising energy costs as two-thirds of Canadian homes are heated by forced air furnaces.

Luckily for Canada, it is the world’s fourth-largest producer and sixth largest exporter of natural gas.  Alberta accounts for 71% of the production according to Government of Canada websites. The downside is Canada only accounts for 4% of global production.

 Oil prices have skyrocketed as well, and West Texas Intermediate (WTI) oil is within spitting distance of $80.00/barrel. That’s good news for Canada, as oil and gas exports accounted for 82% of all domestic energy exports as of 2019.

Source: Canadian Energy Centre

Rising oil and gas prices have been good for the Canadian dollar as well. The Loonie is the only major G-10 currency that gained since closing December 31 and opening level October 6, rising 0.67%.

The domestic economy survived the ravages of the COVID-19 pandemic, and over 27 million Canadians are fully vaccinated, representing 71.4% of the population. Statistics Canada’s “flash estimate” for August GDP growth is 0.7% m/m. Furthermore, analysts expect about 70,000 new jobs were added in September while the unemployment rate declined to 6.8%.

A rebounding Canadian economy coupled with steady to firm energy prices will continue to insulate the Canadian dollar into the winter.

The world may have gas pains, but it may be the sweet smell of success to bullish Canadian dollar traders.