Western Canada's gas storage volumes fall further below five-year minimum

Although natural gas in storage in Canada continues to dip even further beneath five-year lows this winter, regional prices are failing to reflect the inventory shortage.

Western Canada natural gas inventories have veered down sharply from five-year average levels, yet AECO futures have barely budged despite what should be stronger injection demand this summer. This is likely due to the market's focus on constraints on the NGTL pipeline system this summer, and not injection demand, according to S&P Global Commodity Insights.

The deficit has sharply widened this winter, with inventories currently at a 123 Bcf deficit to the five-year average. More so, inventories sit 40 Bcf below the five-year minimum for this time of year.

In an unconstrained market, this would lead to a strengthening of AECO's Summer 2022 strip as the market priced in the likelihood of stronger injections and drive up the price of the AECO Winter 22-23 strip as the winter would be more likely to start with less in storage than previously expected. However, there has been little to no strengthening of either season's strip pricing. While there is some uplift over the past several months, prices are now back to about where they started 2022.

The AECO summer strip averaged an 80 cents/MMBtu discount to Chicago in February. The discount has widened to $1/MMBtu in March.

Looking ahead, even if strong withdrawals persist through the end of winter, as S&P Global Commodity Insights expects, AECO's discount to Chicago will remain wide, as constraints, not injection demand, will likely drive AECO this summer.

Also, S&P Global forecasts a substantial increase to Western Canada production in April that would be larger than past years. If the forecast holds, AECO could face considerable weakness in the second half of the month.

Thus far in March, production has matched S&P Global's forecast of 16.7 Bcf/d. In April, the forecast calls for production to increase about 300 MMcf/d from March's level. Over the past five-years, April production has been largely flat to March, although in 2021 there was a 200 MMcf/d increase month on month.

S&P Global expects strong drilling activity and commodity prices, and plans for producer growth will drive a strong April before the spring breakup causes production to dip in early summer.

If April production ramps up as expected, the East Gate could face constraints around mid-April which would depress AECO pricing. Cold weather could offset this, however, as stronger demand in Western Canada would reduce what needs to be pushed out the East Gate. Cold weather is indeed what the Canadian weather service is forecasting. In this case, AECO could maintain a tight, 40 to 60 cents/MMBtu discount to Chicago.