Below-normal demand helps ease Western Canada natural gas storage deficit

Denver — Despite natural gas storage fields in Western Canada entering 2020 with levels registering below the five-year minimum, weak demand has lessened the deficit in recent weeks, which could lead to lower AECO hub prices if the trend continues.

West Canada storage inventories are now on pace to finish this year's heating season in line with last year's end-of-season total. This is more inventory than S&P Global Platts Analytics originally anticipated, due in part to weaker-than-anticipated demand.

But it remains unclear why demand is down, which presents a wild card for AECO hub prices for the remainder of the year.

After starting this winter below the five-year minimum, West Canada has only withdrawn an average of 0.8 Bcf/d so far this winter, about 0.2 Bcf/d below the five-year average withdrawal rate, and has helped ease AECO's storage deficit.

If withdrawals continue at their winter-to-date rate of 78% of the five-year-average pace, West Canada's working gas in storage will begin injection season with 266 Bcf in storage. This would be 8 Bcf above 2019.

But if demand moves in line with normal levels, the heating season would end with only 247 Bcf in storage, which would register below the five-year average and minimum by 77 Bcf and 11 Bcf, respectively, according to Platts Analytics. It appears storage pulls will eventually increase as the Canadian government is forecasting average to lower-than-average temperatures for the rest of winter.

One reason for subdued withdrawals stems from weaker-than-anticipated demand. Since December, West Canada demand has averaged about 15.2 Bcf/d, which is 0.1 Bcf/d below last winter. Including the recent cold snap, average temperatures across the region have been nearly 3 degrees below last winter and nearly 5 degrees below historic norms.

The decrease in demand would not appear to be residential-commercial related, as it should be stronger than last winter.

Demand from the oil sands appears to be mostly flat year on year, according to the Oil Sands Delivery Area chart from Nova Gas Transmission.

The power sector can explain a portion of the weaker demand. Gas-fired generation in the Alberta Electric System Operator market is averaging 5.6 GW so far this winter, which is down about 0.1 GW from the same time last winter, despite colder weather.

Even if a relatively inefficient simple-cycle unit accounted for the output drop, this would only account for about a 25 MMcf/d gas-demand decrease, according to Platts Analytics. Total power generation in AESO is also down about 400 MW, and coal is down more than gas.

AECO's relative price strength this winter also does not appear to be driving gas-to-coal switching, and wind output is flat.

If demand increases to Platts Analytics expectations, withdrawals could increase and tighten basis prices this summer as injections could be stronger. But, if demand remains weak, particularly into the summer months, this would likely leave more gas in inventory to start summer, driving a weaker AECO basis this summer.