Despite gas storage deficit, Midwest inventories look to rebound by summer

US Midwest gas storage levels have plummeted to more than 12% below normal levels this winter, but rapid demand decline might undo the deficit by season's end, likely leading to lower prices this summer.

Heading into the spring shoulder season, Midwest storage withdrawals have weakened amid increased inbound supply and reduced demand. Month-to-date as of Feb. 23, the Midcon Market has been on the receiving end of 12.5 Bcf/d of supply, up 180 MMcf/d from January, according to S&P Global Platts Analytics.

Meanwhile, Midwest demand has been 2.2 Bcf/d weaker than what it was in January. The extra supply and slackened demand has enabled the Midwest to draw only 5.7 Bcf/d from storage, down from 8.2 Bcf/d in January. February withdrawals were forecast to average 7.1 Bcf/d.

The weaker-than-expected withdrawals have set the stage for reduced injection demand this summer. Upper Midwest storage levels were at 413.1 Bcf on Feb. 22, 23 Bcf less than levels at this time in 2021. On Jan. 22, inventories were nearly 65 Bcf lower year on year. The 41 Bcf month-on-month reduction in storage deficits from last year's levels alleviates 200 MMcf/d in summer storage injection demand, which could lend bearish pressure to basis prices throughout the Midwest.

The Midwest region is expected to export less gas to Canada this year while shipping greater volumes to US Southeast, according to Platts Analytics.

Dawn's summer 2022 strip is currently trading at about a 1 cent/MMBtu premium to that of Chicago this summer, but this could be too strong. This summer, Platts Analytics expects the Midwest to deliver 1.4 Bcf/d into Ontario, around 300 MMcf/d less than it did last summer. In summer 2021, Dawn cash prices averaged a 3-cent discount to Chicago when Midwest to Ontario flows averaged 1.7 Bcf/d.

Less gas flowing from the Midwest towards Dawn implies its basis should trade lower versus Chicago this summer than last summer's 3-cent discount. Meanwhile, East Canadian storage levels are currently 14 Bcf higher than where they were last year. This is supportive that Dawn should be cheaper relative to Chicago, suggesting the region's injection demand this summer could be less than it was in summer 2021.

The Midwest is also poised to boost shipments to the Southeast this summer even if it means undercutting Haynesville supply, futures spreads indicate. The Chicago summer 2022 basis strip has averaged minus 25 cents/MMBtu since Feb. 1, around 8 cents weaker than at the turn of the year. Midwest supply length may be driving Chicago's weakness, but the hub is also setting up to compete with strong Haynesville production in order to move gas south, according to Platts Analytics.

As such, Chicago summer 2022 strip has averaged 19 cents under Carthage since Feb. 1, well under the 4-cent premium to Carthage that cash prices averaged last summer. This winter, although Chicago has averaged a sizeable 14-cent discount to Henry Hub, the Midwest has actually received 460 MMcf/d. This is a break from its normal flow amid strong Chicago discounts, likely due to added Haynesville supply along the Midwest to Southeast corridor. Widened Chicago prices versus Carthage will help the Midwest send 1.5 Bcf/d to the Southeast this summer.