Midwest gas storage deficit puts Chicago basis prices at risk this summer

Basis prices at the Chicago city-gate could face upside risk this summer as low gas storage levels across the US Midwest promise to fuel strong injection demand, tightening the regional supply balance.

Over the past several months, summer 2022 forwards contracts at Chicago have failed to keep pace with rising price expectations at the Henry Hub, leaving Chicago basis valuations at historic lows.

For the peak-summer months of June, July and August, the Chicago city-gate is now priced at an average 27 cents discount to the US benchmark – down from an average 12 cents discount over the same three-month period last summer and about 17-18 cents discount in summer 2020 and 2019, data from S&P Global Commodity Insights shows.

The collapse in Chicago basis prices for summer 2022 comes despite significant supply risk posed by low Midwest gas storage levels and potentially strong injection demand this season.

Storage

As of the week ended April 15, inventory levels in the Midwest region are estimated at 304 Bcf, according to the latest data published by the US Energy Information Administration.

Midwest gas storage levels are now among the lowest of any EIA storage region, standing at a 116 Bcf, or nearly 28%, deficit to the corresponding year-ago level. Compared with the five-year average, inventories are down 72 Bcf this season, equivalent to a roughly 19% deficit, EIA data shows.

During a typical injection season, Midwest inventories would be expected to fill to a maximum level around 1.1 Tcf by early November which would require total injections of nearly 800 Bcf this season. Based on the current inventory deficit, regional injection demand would need to average about 4 Bcf/d over the next six months to reach that level, or about 350 MMcf/d above the historical average.

Flows

One factor that could potentially help to offset low Midwest gas storage levels this summer is strong net gas transmissions into the region. April to date, inbound flows have averaged just over 13 Bcf/d or their highest for the month of April since 2019, flow data from S&P Global shows.

Increased supply coming from Canada is a major driver behind the trend.

In April, net transmissions from Canada to the Midwest are at a four-year high. Over the past several months, imports on Great Lakes Gas Transmission have averaged their highest in over a decade, driven by strong supply from the AECO hub in Western Canada. According to a recent analysis from S&P Global, elevated imports on the cross-border pipeline are likely to continue this summer, potentially making Michigan's gas storage fields among the first to fill in the Midwest region.