Above-average temps, gas-to-coal switching prompt stronger Midwest gas injections

Below-normal temperatures combined with rapidly refilling natural gas storage fields in the US Midwest are dragging down Chicago prices relative to Henry Hub, but prices remain high enough to prompt gas-to-coal switching.

Lower temperatures, increased gas-to-coal switching and additional inflows from the West are boosting Midwest storage injections in July. Chicago basis this July has averaged minus 20 cents/MMBtu, 14 cents/MMBtu weaker than June.

June's temperatures across North America were above average, with the Midwest 1.7 degrees Fahrenheit higher than the five-year average and 12.6 degrees above May. The heat drove stronger demand in the Midcontinent Independent System Operator service area. Total generation there rose 331 GWh's from May.

Coal, though rising 174 GWh month over month, was unable to meet all the rise. MISO subsequently turned to natural gas-fired generation, raising it 182 MWh from May. Gas' share of the thermal load increased 2% month over month to 45%. S&P Global Platts Analytics data shows power burn rose 1.2 Bcf/d month over month, to 3.2 Bcf/d. Chicago basis strengthened from May's minus 12 cents/MMBtu to minus 6 cents/MMBtu in June.

The above-average temperatures that pushed Chicago basis stronger in June have dropped to below-average in July. Midwest temperatures for the month, as of July 9, have averaged 75 degrees, just 2.8 degrees above June. Historically, they rise 6 degrees month over month.

However, Chicago cash prices have risen 33 cents/MMBtu to $3.47/MMBtu in July, encouraging gas-to-coal switching despite a narrower basis. Natural gas-fired generation in MISO has subsequently fallen 106 GWh while coal has increased 80 GWh in July.

Natural gas' share of the thermal load was 38% as of July 9, 7% lower than June. Power burn is now at 2.9 Bcf/d, down 332 MMcf/d from June.

Temperatures in the Western United States and Canada have similarly dipped below normal, weakening both power-burn demand and prices across the West. Kingsgate basis to Henry Hub is at minus 59 cents/MMBtu, while AECO is at 53 cents/MMBtu behind the benchmark. Both have fallen from June.

This has made flows to the US Midwest more economic. Rockies inflows have averaged marginally higher this month at 1.1 Bcf/d, while West Canada imports have risen to 3.8 Bcf/d, the strongest they have been all year, according to Platts Analytics.

This weakened demand in the Midwest from cooler-than-usual temperatures as well as additional supply from Western and Canadian regions has helped weaken Chicago basis to minus 20 cents/MMBtu so far in July.

Subsequently, storage field injections in the Midwest have increased to a six-year high, rising to a month-to-date average of 4.2 Bcf/d, nearly 900 MMcf/d above June. Outflows to the Southeast also ramped up to 904 MMcf/d, 141 MMcf/d above June.

Through July 20, temperatures in the Midwest are forecasts to average 73.2 degrees, which is less than 1 degree above June's average. Normally temperatures rise 6 degrees during this time. This should keep power burn steady at 2.9 Bcf/d, flat with June, but 700 MMcf/d below normal.

This weakness should mean a more bearish Chicago basis, enticing stronger injections throughout July. This could in turn present additional downside risk the remainder of the summer as inventories fill faster than expected during what is typically a peak demand month of the injection season.

Midwest storage sits at 638 Bcf, which is only 18 Bcf behind the five-year average, according to US Energy Information Administration data.