ANALYSIS: High storage, recovering production, lower demand weigh on Midwest natural gas price outlook

New York — US Upper Midwest natural gas prices are standing on shaky ground as volumes cross the five-year maximum threshold and Bakken production continues to outperform expectations as operators tamp down flaring.

Strong storage inventories, warmer than normal temperatures and an active hurricane season has sent Chicago basis versus Henry Hub to a month-to-date average of approximately minus 45 cents/MMBtu. It struck a daily low of minus $1.03/MMBtu on Oct. 12, the weakest it's been since January 2018. This is likely to continue for the coming weeks until production falls once again amid rising winter demand, according to S&P Global Platts Analytics.

Midwest working gas storage volumes surpassed the five-year maximum in mid-August and have remained just above that level, according to data by the US Energy Information Administration. Stocks stand at 1.081 Tcf and will likely surpass the all-time high of 1.154 Tcf.

While storage inventories have trended well above normal since the beginning of the summer, recently returning production has also increased supply. Production in the Upper Midwest fell to 1.7 Bcf/d in May with flows on Northern Border Pipeline from the Bakken Shale in North Dakota to Chicago decreasing to 1.1 Bcf/d from 1.9 Bcf/d in March, according to Platts Analytics.

The Bakken has seen month-over-month production gains since then, with October averaging 2.2 Bcf/d, tied with March for the highest month in 2020. Platts Analytics had forecast Bakken production would begin falling this month, to 1.9 Bcf/d from September's 2 Bcf/d .

Data from the North Dakota Industrial Commission has Bakken production bouncing back even stronger, averaging 2.6 Bcf/d in August, the latest state data available. It's a remarkable turnaround from the 1.9 Bcf/d reported for May, right after operators began shutting in wells due to the crude price collapse and demand destruction related to the coronavirus pandemic.

What's more, operators in the shale play are utilizing new gathering and processing capacity, lowering the amount of associated gas flared from 12% in May to 8% in August. The 8% flaring rate is the lowest percentage ever reported from the NDIC, whose data stretches back to 2012.

This growing supply from returning production in the region and surrounding regions further weakened Chicago prices as the summer progressed.

Exacerbating this filling storage and returning supply has been lower demand than normal. Chicago is expected to finish October 2 degrees above normal, with the entire Upper Midwest region averaging 1 to 4.9 degrees above normal according to the Weather Desk. So far this month, total demand in the region has averaged 9.9 Bcf/d, 1.4 Bcf/d below this time in October 2019.

The region typically sends excess gas to the Southeast, but that demand too has been limited. Net outflows this month have dipped to 1.2 Bcf/d so far this month, down from August and September's 1.5 and 1.4 Bcf/d, respectively. While normal maintenances have contributed to reducing flows, Hurricane Delta dropped net outflows Oct. 9, the day the storm made landfall in Louisiana, to 888 MMcf/d with the next two days averaging 1.2 Bcf/d. This lower demand and supply route loss has increased gas in the region and exacerbated the strong storage inventory's weight on Chicago.

Platts Analytics does not expect this to persist long. Hurricane season typically ends in late November while cooler temperatures will raise residential and commercial demand and draw on storage inventories once again even as gas-fired power demand wanes.