ANALYSIS: Canadian working gas storage inventories slide well below five-year average

Canadian natural gas production continues to demonstrate surprising strength this summer, but the nation's storage fields remain 11% below the five-year average, which is nearly double the deficit US storage inventories are facing as winter demand approaches.

Western Canada storage fields held 408 Bcf of working gas as of Aug. 27, according to data by S&P Global Platts Analytics. This is well below the five-year average of 457 Bcf and last year's 487 Bcf in the corresponding week.

Even under a normal weather scenario, Platts Analytics is forecasting a tight balance for Western Canada this winter. Exports to the US are expected to be strong, while demand has been exceeding expectations in a trend that should continue through the winter.

Platts Analytics is expecting 300 to 400 MMcf/d of Canadian demand growth this winter from last, primarily from coal power plants converting to gas. In addition to strong local demand, last winter's export strength to the US appears poised to repeat itself. Oklahoma production took a substantial hit from the pandemic leading to less available supply for the US Upper Midwest last year. It is expected to continue this winter. This means that Western Canada is likely to fill this void in the US Upper Midwest. This would pull on AECO via Great Lakes and Viking pipelines.

Canadian producers have developed growth plans likely leading to an 800 MMcf/d increase in production over last winter. However, even new production of this magnitude leaves the market tight and vulnerable to a cold winter.

These producer plans were laid out earlier in the year when AECO was expected to be below $3.00/MMBtu or even below $2.50/MMBtu. However, AECO is now expected to be in excess of $3.00/MMBtu this winter, the strongest it has been in years.

Producers' financial health across North America has drastically improved in the past two quarters, following improved commodity prices and continued financial discipline. Canadian operators on average have reduced their net debt levels by 11% since the start of the year. Platts Analytics expects the reduction could be over 20% by year-end.

Meanwhile, US gas operators have only managed to reduce their net debt by 5% since the start of the year. Broadly, operators have stuck to capital discipline, but Canadian operators are starting to redeploy capital back to the drill bit while also more rapidly paying down debt. Canadian gas operators are now expected to increase capital expenditures 21% year on year, up from their original guidance of 13%. Contrast this to US gas operators, which have had to truly stick to capital discipline, with their 2021 capex down 4% on average.

Western Canada production is supported by ample takeaway capacity, local demand growth as, lower hedged volumes taking advantage of higher prices, high export demand and a financial health that is superior on average compared to US operators.

Based on strip pricing of $3.00 AECO, and an increasingly improving financial situation for operators in Canada, the outlook has improved drastically from the depths of just a few years back.