Western Canada natural gas storage falls further below five-year low on firm AECO

The bitter cold biting the Lower 48 continues to affect Canada as well, driving maximum daily withdrawals from gas in storage and opening a wider deficit to the five-year low as marketers take advantage of strong AECO spot prices.

Withdrawals have been essentially maxed out recently due to high cash prices incentivizing traders to pull gas out of storage for sale into the spot market, according to S&P Global Platts Analytics

Western Canada's withdrawals could even see a boost in the coming weeks, as demand is expected to be largely flat, while takeaway capacity out of Alberta is expected to see a modest increase. Takeaway through the East Gate on the NGTL pipeline system is forecast to be unconstrained starting Feb. 2 through the rest of the month, with capacity scheduled to be 5.12 Bcf/d for a gain of 175 MMcf/d over the January average. This extra 175 MMcf/d through the East Gate could theoretically cause withdrawals to increase by a similar amount.

Population-weighted temperatures in the region are forecast to average 27 degrees Fahrenheit through Feb. 18, which would be roughly flat to the past two weeks.

AECO's balance-of-the-month contract traded at $4.25/MMBtu on Feb. 4. This price is considerably higher than the $3.40/MMBtu AECO averaged in the second half of January that was driving maximum withdrawals from storage holders.

Platts Analytics expects these strong withdrawals to continue, and that Western Canada's deficit to the five-year low will continue to widen. Western Canada's volumes in storage stood at 273 Bcf as of Feb. 4, which is 110 Bcf less than this time last year and 95 Bcf below the five-year average. Over the past eight years, the lowest storage has been at this time of the heating season was 289 Bcf in 2020.

Although historically low storage, cold weather and strong Canadian exports to the US are all providing upward pressure on AECO pricing, the startup of a new project across the border in North Dakota could eat into export capacity.

WBI Energy's new North Bakken Expansion Project began nominating Bakken production to Northern Border Pipeline on Feb. 1, marking the startup of this expansion that is expected further erode AECO's market share on this key outlet pipe.

The new expansion delivered to 45 MMcf/d on Feb. 1 and 75 MMcf/d on Feb. 2 to Northern Border Pipeline via the Elkhorn Creek interconnect, Platts Analytics' data showed. The 250 MMcf/d expansion could be expanded to 625 MMcf/d through additional compression, should market need be there in the future.

Bakken production has left just 800 MMcf/d of available space for AECO exports on Northern Border the past several weeks, so this new expansion has the potential to take even more of AECO's remaining market share. Bakken gas production is associated gas from oil focused drilling with operators mostly focused on their returns from oil, so Bakken gas is assumed to undercut AECO on Northern Border for operators to meet flaring requirements in North Dakota, according to Platts Analytics.

The Bakken began taking substantial market share from AECO on Northern Border in 2017. In 2016, the Bakken left room for 1.6 Bcf/d of supply from AECO on the pipe, and this has been dwindling since. This new expansion is expected to further eat into what AECO can export to Northern Border and will be bearish for AECO in the long term.