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(Reuters) - U.S. utilities and merchants are embarking on their biggest buying spree for Canadian natural gas since the start of the U.S. shale boom, taking advantage of record low prices and raising concerns about the U.S. industry's deepening crisis.
Traders have been scooping up more gas from Canada, the world's fifth largest producer, in recent months after prices at the AECO hub in Alberta sank to a big discount to the U.S. benchmark.
With some analysts expecting the arbitrage to remain in place through the summer and traders having booked long-term pipeline deals, the shipments could last longer than previously expected, experts warn.
The deals will feed growing consumption from power generators after a record number of coal plants retired last year. In addition, gas demand is rising as the United States exports more gas to Mexico via pipeline and ramps up exports of liquefied natural gas to the world, traders said.
The scramble has also offered loss-making Canadian drillers a chance to continue pumping out product as domestic tanks continue to fill up and prices languish near record lows.
But market experts worry the surprisingly strong imports could prolong the U.S. market's biggest rout in a generation, adding to the ballooning glut after a warm winter left Canadian and U.S. storage facilities at record highs.
"We're still pulling too much supply out of the field," said Martin King, an analyst at Alberta energy advisory FirstEnergy Capital.
Now analysts expect Canadian imports to the United States to rise this year for the first time since 2007 when growing output from U.S. shale fields like the Marcellus in Pennsylvania started to displace Canadian fuel.
Some traders and producers have booked deals for as long as one year to ship product to the U.S. Midwest on TransCanada Corp's Mainline pipeline, said Keith Barnett, head of fundamental analysis at ARM Energy in Houston, a big U.S. gas marketer.
The Mainline runs from Alberta to Quebec and connects with several pipelines capable of moving Canadian gas to the U.S. Midwest.
The need to find homes for surplus Canadian gas became more urgent last month after wildfires knocked out half of the nation's oil sands production capacity, curbing demand for the fuel. Oil sands producers use large amounts of gas to produce power and steam to cook the oil sands to produce crude.
Prices in Alberta, where two-thirds of Canada's gas is produced, fell to around 50 Canadian cents per thousand cubic feet, the lowest on record, in mid May.
Prices have since recovered to about C$1.50 this week due to the return of some oil sands operations as the fires recede, but AECO prices remain the lowest cost option for many U.S. regions.
Most analysts expect prices at the U.S. Henry Hub benchmark to average about $2.28 per million British thermal units in 2016. So far this year, the hub has averaged only $1.96, the lowest annual start since 1999.
Canada's exports fell to about 7.4 bcfd in 2015, their lowest since 1994, according Canadian and U.S. federal energy data.
Since the start of this year's storage injection season in April, Canada has exported about 400 million cubic feet per day more gas to the United States than last year.
While Canada is expected to produce about 15.1 bcfd in 2016, about the same as in 2015, that is far in excess of the 10.1 bcfd needed domestically.
With storage tanks 74 percent full last week, drillers are under increasing pressure to sell south.
"Gas imports from Canada ... continue to be a source of worry for our calls of a continued (U.S.) market recovery in the second half of 2016," analysts at Morgan Stanley said in a recent note.
Reporting by Scott DiSavino; Editing by Tom Brown