Canadian crude prices support associated gas growth; storage concerns remain

Although elevated prices at WCS Hardisty support stronger associated natural gas production in Canada for the upcoming injection season, system constraints could widen the already steep storage deficit in the weeks ahead.

S&P Global Commodity Insights expects to lower its summer production forecast to around 1 Bcf/d of summer-over-summer growth from 1.3 Bcf/d currently, although strong oil prices could push gas production higher than this through strong associated gas growth.

These growth assumptions stem from the oil price outlook. WTI forwards show the next three years trading above $70/b. This is a good indicator of what condensate production will fetch, which is expected to be another source of associated gas growth in the coming years. Even the WCS Hardisty, the Canadian crude benchmark, outlook is above $60/b for the next three years, assuming a $10/b discount to WTI, according to S&P Global.

S&P Global expects to lower its summer-over-summer Canadian production growth to about 1 Bcf/d, but oil prices and the resulting growth expectations could provide some upside to this, especially in the later months of summer when production begins to rebound from the spring break-driven lull in mid-summer.

However, the jump in production to all-time highs still might not be enough to offset Canadian storage volumes resting below the five-year minimum.

Western Canadian inventories have slowed drawing down in mid-March, although capacity reductions through Upstream James River could limit production and there could be further widening from historical norms in the coming weeks, according to S&P Global.

Western Canadian gas inventories have been hovering around 125 Bcf below the five-year average in the week ended March 12, but higher demand is on the way, and production will likely not increase enough to offset this. Over the week that begins March 20, demand is expected to remain nearly unchanged from the week prior, but then the last week of March is forecast to see demand rise about 750 MMcf/d from current levels.

Capacity through NGTL's primary production zone, Upstream James River, which is also the most prolific production zone for all of Western Canada, is scheduled to allow production to increase about 200 MMcf/d in the final week of March, meaning much of the increased demand will be met with storage withdrawals.

This will add to Western Canada's storage deficit and test the NGTL storage system's ability to refill this summer. S&P Global expects injections to lag all summer long due to operational constraints and weak spreads to the winter strip, meaning next winter could begin with a substantial storage deficit.