Frigid Canadian winter slashes gas exports to US as demand soars to record highs

The effects of the Canadian cold spell continue to trickle down to the US Midwest, slashing natural gas exports to the region while propelling prices higher.

A cold snap in Western Canada has driven record demand and sharp production freeze-offs over the past 10 days. Exports to the US Midwest fell dramatically, to as low as 2.2 Bcf/d from 3.8 Bcf/d prior to the cold snap, according to S&P Global Platts Analytics.

The Chicago prompt-month basis contract quadrupled as this happened, as traders feared a cold snap in the Midwest could send Chicago prices shooting skyward similar to AECO.

The prolonged and deep cold snap across Western Canada has led to a major drop in gas exports to the US Midwest. Right as the frigid temperatures in Western Canada cut exports, the same cold front drove freeze-offs in the Bakken, cutting supply to Chicago even further.

The cold drove demand to a record high on top of strong year-over-year baseload demand growth in the oil sands. At the same time the icy conditions also drove sharp production freeze-offs. AECO then priced up relative to Chicago, as it needed to keep gas to meet demand in Western Canada. It averaged a 22 cents/MMBtu premium to Chicago during the week between Christmas and New Year's Day compared with a 38-cent discount in the weeks leading up to the cold snap.

Demand on the NGTL pipeline systems has reached new record highs every day since Dec. 14.

As the cold weather drove this tight AECO market, flows to the Midwest dropped dramatically. The cold snap drove temperatures in the Bakken to an average of minus 8.5 degrees Fahrenheit from Dec. 25-Jan. 1, and the resulting freeze-offs led to less Bakken supply getting onto Northern Border for delivery into Chicago and the Upper Midwest, just as AECO was pricing up to keep gas for itself, according to Platts Analytics pipeline flow data.

When trading started back up after Christmas, Chicago's January basis contract shot up to nearly $1.60/MMBtu, from 40 cents/MMBtu in the days leading up to the cold snap. The January balance-of-month contract has since settled somewhat but remained elevated at 55 cents/MMBtu in Jan. 5 trading.

This price strengthening may be due to concerns that severe cold in Western Canada and the Bakken at the same time as the US Midwest could leave the Chicago market short and send the hub spiraling upward. The Canadian government is forecasting cold weather across Western Canada for the remainder of winter, so cold snaps up there could continue to happen. If one occurs right as Chicago has one too, Chicago could face a short market and prices could soar.