Midcontinent outbound gas transmissions rise in risk to regional storage, winter markets

Wide price spreads from Kansas and Oklahoma to the Henry Hub this summer are diverting more of the region's gas production away from storage to supply export and industrial markets along the Gulf Coast, posing an emergent risk to Midcontinent winter inventories.

At the producing region's benchmark location, NGPL Midcontinent, cash prices have dipped to an average 26 cent discount to the Henry Hub since July 1 – a notable drop from discounts of just 20 cents in June and 22 cents in May. Compared to last summer, the basis decline is even larger. In June, July and early August 2020, NGPL Midcontinent averaged about 13 cents behind Henry Hub, S&P Global Platts data shows.

Steeper basis discounts in the Midcontinent have incentivized more of the region's production to flow southbound towards the Gulf Coast.

Beginning in the second week of July, flows from the Midcontinent to the US Southeast leveled up to around 1 Bcf/d where they've since remained. Volumes are up from an average 920 MMcf/d in June and just 850 MMcf/d in the June-to-early August period last summer, data from S&P Global Platts Analytics shows.

Net outbound transmissions from the Midcontinent are also up over the past month, implying that increased deliveries to the Southeast are not simply reshuffled volumes from other destination markets.

Production, Storage

As Gulf Coast demand for the region's supply ramps up, producers in the SCOOP-STACK and the Anadarko basins have been unable to keep pace, requiring shippers to draw on Midcontinent storage.

Since the start of July, gas production in the Midcontinent has averaged about 6.05 Bcf/d – a modest decline from average levels over 6.1 Bcf/d in the second quarter, Platts Analytics data shows.

In August, inventory levels in the Midcontinent have hovered just below 170 Bcf. That's down from summer-season highs at over 174 Bcf to the lowest early-August level in at least five years. Even presuming that five-year average injections could begin immediately, storage levels in the Midcontinent would end injection season with just over 210 Bcf in the ground, nearly 60 Bcf, or about 22%, below average.

Midcontinent forwards

Summer to date, winter forward prices in the Midcontinent producing region are up sharply, closely tracking upward momentum at the Henry Hub.

Since mid-July, though, Midcontinent winter-season contracts have appreciated vis-à-vis benchmark gas. As of early August, the NGPL Midcontinent January contract is trading at a nearly 15 cent premium to Henry Hub – up from just a 5 to 6 cent premium earlier this summer, S&P Global Platts' M2MS data shows.

This winter, weak production and low storage levels in the Midcontinent could create a risk for severe price shocks in the region's gas markets, which are relatively isolated from alternative supply in comparison to hubs along the Gulf Coast.

Last winter, as Polar Vortex weather swept across the Midcontinent, Texas and the Southeast, Midcontinent gas shippers halted net outbound transmissions as the region struggled to meet demand amid a historic wellhead freeze-off that nearly halved gas production in Oklahoma and Kansas.

With limited supply available to the region's end users, prices at NGPL Midcontinent, Southern Star and Enable Gas East hit record high settlements ranging from $380 to over $620/MMBtu. ONEOK, Oklahoma recorded the highest ever cash-price settlement during the event at a record $1193/MMBtu, S&P Global Platts data shows.