Lower natural gas demand for US Midwest this winter looks to offset supply losses

New York — Elevated natural gas storage volumes and lower demand looks to offset decreased supply flowing into the US Midwest this winter, but Chicago prices could strengthen if the region pulls more gas from the Southeast to mitigate supply losses.

Total Midwest supply is expected to fall in winter 2020-21 from the previous winter on declining Bakken Shale production and lower inflows. Total production in the region last winter averaged 2.3 Bcf/d, but should fall to 2 Bcf/d this coming winter, according to S&P Global Platts Analytics. While Bakken production has recovered much since March's price collapse, production is still expected to be 257 MMcf/d below winter 2019-20 levels, at 1.8 Bcf/d.

Additionally, lower production in surrounding regions has reduced supply to the Upper Midwest. Of particular note is Oklahoma's SCOOP/STACK play, where production has not rebounded as initially expected after 2020's price and production plummet. Production is expected to average 5.9 Bcf/d, down 1.8 Bcf/d from last winter.

Rockies production is expected to decline 1.3 Bcf/d year on year this winter to 7.7 Bcf/d. This is forecast to reduce inflows from the Rockies to the Midwest by 439 MMcf/d to 1 Bcf/d.

Total inflows from the SCOOP/STACK, Rockies, Northeast and Western Canada are therefore expected to decline by a total of 1.8 Bcf/d this winter from last. Outflows to East Canada are expected to decline 750 MMcf/d, partially offsetting lower supply from surrounding regions. Net flows to the Midwest should falter to 10.9 Bcf/d from 12.2 Bcf/d last winter, according to Platts Analytics.

Lower demand should help mitigate some of this supply loss. Total demand is forecast to average 17.9 Bcf/d this winter, down 522 MMcf/d year on year. While residential and commercial demand is expected to pick up from last winter by 153 MMcf/d, gas-fired power generation is expected to decline by 421 MMcf/d. Industrial demand is also expected to decline by 243 MMcf/d.

The Midwest region can also rely more heavily on storage to resolve supply loss. With 924 Bcf in storage, working gas volumes stand 12% above the year-ago level as well as the five-year average at this time of the year, according to the US Energy Information Administration. If stocks in the region build at the five-year average rate, storage will peak at 1.136 Tcf, which is only 18 Bcf less than the all-time high set in 2016.

Overall lower demand and high storage in the coming winter should help mitigate some of the supply losses expected from declining production and inflows. Chicago basis in peak months, in particular, however, continue to have an upside risk. Rising demand with more normal temperatures will likely combine with lower supply. In these peak months, Platts Analytics data shows Chicago will need to draw on gas from the Southeast, which should provide significant support for Chicago.