Tight AECO-Malin hub spreads might cut into US Pacific Northwest imports

Denver — The US West Coast, which currently holds the lowest amount of natural gas in storage relative to the five-year average, faces additional potential supply issues this winter as tighter spreads between AECO and the Malin hubs could cut into Canadian exports flowing to the US Pacific Northwest.

Also, high temperatures forecast for the US Southwest the weekend of Sept. 5 and 6 look to draw even further on supply. It comes on the heels of an August scorcher, which caused rolling blackouts and fueled fire danger conditions across California and large parts of the western US.

If historically strong withdrawals and potentially stalling-to-declining associated gas production from slowly rebounding oil-focused wells in Western Canada come to fruition, the AECO-to-Malin spread may face tightness as it has this summer, significantly eating into inflows to the Pacific Northwest, adding bullish sentiment to regional pricing, according to S&P Global Platts Analytics.

The spread from AECO to Malin has observed above-normal tightness through the bulk of this summer, only recently widening to an average of 29 cents/MMBtu in August driven by the heatwave across the Western US. Between April and July, AECO cash prices averaged an 8 cent discount to Malin, tightening $1.01/MMBtu year over year, squeezing Western Canadian inflows into the region down to about 2.83 Bcf/d during this period, a decline of roughly 280 MMcf/d year over year.

Remnants of the heatwave have carried over into September, maintaining a 28 cent discount between AECO and Malin that has incentivized stronger inflows from sticking around, but should be short-lived once weather returns to normal.

Platts Analytics is forecasting the spread between AECO to Malin to average $1.06 this winter with Western Canadian inflows projected to average 3.76 Bcf/d. However, maintaining a spread nearly twice as strong as last winter's 57-cent average and inflows well above last winter's observed 3.48 Bcf/d average will likely be challenged and face an uphill battle assuming strong withdrawals and production declines materialize in Western Canada.

Working gas inventory in the Pacific region stands at 304 Bcf, which is only 9 Bcf more than the five-year average, according to the US Energy Information Administration. During August, the region pulled 7 Bcf from storage as cooling demand surged under a heat wave. Over the past five years, the region added 5 Bcf to storage during the month.

Forecasts call for more scorching temperatures for the holiday weekend, likely leading to another net withdrawal from stocks for the week in progress, boosting regional prices. In anticipation of elevated loads due to high temperatures, California Independent System Operator announced it would be implementing restricted maintenance operations from Sept. 5 through Sept. 7, in an attempt to mitigate system reliability concerns that materialized in mid-August, causing pricing to blow out.

Also, the National Weather Service has issued an excessive heat warning set to take effect in Nevada and Arizona commencing Sept. 4, while California's warning sets in on Sept. 5. Southwestern temperatures are forecast to average 82 degrees from Sept. 4 through Sept. 7, 8 degrees above normal temperatures.

Platts Analytics is forecasting Southwestern demand will average 11.2 Bcf/d through Sept. 7, an increase of about 1.7 Bcf/d over the prior week's level, with demand topping out at 11.8 Bcf/d on Sept. 6. This will likely lead to an increase in regional prices, as was observed during the August heatwave.