Chicago city-gate basis blues likely to continue into December on weather, storage

Cash basis at the Chicago city-gates hub will likely remain under pressure this month following historic lows in November as mild weather and high storage levels keep the Midwest gas market well supplied.

On Dec. 3, cash prices at the Chicago city-gates were down sharply, falling over 30 cents on the day as a cold front in the Midwest eased, lifting temperatures and depressing demand. In early afternoon trading, Chicago was pricing around $2.30/MMBtu, or about 16 cent below benchmark Henry Hub gas, preliminary settlement from S&P Global Platts showed.

Over the next week, temperatures are projected to continue rising from the low-30s Fahrenheit currently, to the low-40s F by early next week, further depressing demand, forecast data from S&P Global Platts Analytics shows.

Bearish near-term weather and demand forecasts continue a trend that began last month.

Historic November

In November, Midwest population-weighted temperatures averaged a balmy 45 degrees Fahrenheit – about 4.7 degrees above the prior five-year average and the warmest November since 2016.

Milder weather halted the typical ramp up in residential-commercial heating demand. During the month, homes and businesses in the Midwest burned just 7.3 Bcf/d on average – also the lowest demand figure for November since 2016, according to Platts Analytics data.

Weather was responsible, at least in part, for record low cash-basis prices in Chicago last month, which averaged a 15-cent discount to Henry Hub. In early November, as population-weighted temperatures climbed into the 60s F, Chicago briefly traded more than 60 cents below the benchmark.

Weather, storage

Moving into December, weather forecasts indicate mild temperatures are likely to continue.

According to a 30-day outlook from the National Weather Service, the entire Midwest region will see a 33% to 50% probability for above-average temperatures this month. The forecast updated Nov. 30 puts key demand centers like Chicago, Detroit, Indianapolis and Milwaukee within a 40% probability band for milder weather.

A demand forecast from Platts Analytics shows Midwest heating demand would likely average somewhere in the upper 10 Bcf/d range this December, assuming normal weather conditions prevail. Warmer temperatures could significantly lower demand. In December 2015, Midwest temperatures averaged 8 degrees above normal, cutting residential-commercial demand to just 7.8 Bcf/d that month.

This December, mild weather could be compounded by high storage levels. According to Platts Analytics, Midwest storage is currently estimated at 981 Bcf, or about 40 Bcf above the prior five-year average. Assuming inventories remain high, the additional supply could begin pressuring the market.

Since early November, January forward-basis at Chicago city-gates has already tumbled nearly 25 cents/MMBtu, in response to recent market conditions. On Dec. 2, Chicago's January forward contract settled at a 6-cent discount to Henry Hub, down from an 18-cent premium on Nov. 2, S&P Global Platts' most recently published M2MS data shows.