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Canadian spot gas prices feel the pinch of lower exports to the US

Highlights

Cash AECO-Henry Hub discount surpasses $6/MMBtu

Canada-to-US exports down around 800 MMcf/d since Aug. 1

Canadian spot natural gas prices have tumbled in recent trading sessions, as pipeline capacity constraints and cooler temperatures reduce the amount of gas flowing south into the US.

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West Canada spot gas benchmark TCPL Alberta, AECO-C has lost around 40% of its value since the start of August, falling to trade around C$ 3.40/GJ Aug. 12 from C$5.675/GJ Aug. 1, pricing data from S&P Global Commodity Insights shows. AECO spot gas has seen its discount to cash Henry Hub deepen dramatically over the last 30 days, soaring to more than $6/MMBtu by mid-session of Aug. 12 trading.

Westcoast Station 2 spot gas has experienced similar downward pressure in recent weeks, falling around 50 cents in Aug. 12 trading to C$2.96/CJ at mid-session, down from C$5.62/GJ on Aug. 1.

Sustained robust gas production in Canada has compounded the pricing impact of lower exports, with volumes remaining elevated compared with year-ago levels. Platts Analytics modeled data shows that Canadian gas production has averaged 17.14 Bcf/d month-to-date, up 1 Bcf/d from the same time in 2021.

Some of this additional gas has been directed to Canadian storage, with Alberta storage levels rising to 288 Bcf Aug. 12, up 3% from 280 Bcf Aug. 6, data from Platts Analytics shows. Ontario gas storage levels also increased over the last seven day to 201 Bcf Aug. 12, up from 192 Bcf on Aug. 6.

Lower gas exports to US

A combination of pipeline capacity constraints in the US Northwest and falling gas demand in the US Northeast have led to a nearly 800 MMcf/d decrease in Canada-to-US gas flows since the start of August.

The decrease in cross-border flows has accelerated since Aug. 8, when Gas Transmission Northwest declared a force majeure that limits Flow Past Kingsgate to 2 Bcf/d until further notice, citing an unexpected compressor station failure at Compressor Station 3 Unit B. Full operational capacity at Kingsgate is typically around 2.7-2.8 Bcf/d, but a series of planned maintenance events had limited Kingsgate capacity to 2.367 Bcf/d in the days prior to the force majeure event.

Pipeline nomination data shows that shippers have maxed out available Kingsgate capacity, with flows falling around 340 MMcf/d since the Aug. 8 capacity reduction to average 2.03 Bcf/d Aug. 8-12 from 2.37 Bcf/d Aug. 1-7. The constraint has put downward pressure on GTN, Kingsgate spot gas, which has seen its spread to cash Henry Hub blow out to an average discount of $4.67/MMBtu month-to-date, from around $2.76/MMBtu in July.

A downward shift in Northeast power sector demand for gas has also reduced Canada-to-US gas flows.

Gas demand in the US Northeast plunged 4.2 Bcf/d, or 21%, to 15.9 Bcf/d Aug. 12 from Aug. 9, as the average regional temperature dropped 10 degrees to 73 degrees Fahrenheit Aug. 12. Canada-to-Northeast flows via Iroquois fell to 220 Aug. 12 from 943 MMcf/d Aug. 9, Platts Analytics data shows.

Outlook

Canadian spot gas prices could remain depressed in the near-term, with below-average temperatures forecast in the US Northeast through at least Aug. 19 and no sign of when Kingsgate capacity restrictions will be loosened.

With local spot gas prices so deeply discounted, some Canadian gas producers may choose to take the foot off the gas on production, which could provide some relief for prices. Already, Canadian gas production has fallen slightly from July levels, Platt Analytics data shows, with more cuts potentially on the way.