Canada's gas storage injection activity remains low as spreads promote exports

Despite an ever-growing natural gas storage deficit, price spreads continue to compel Canadian producers and marketers to export volumes to the US rather than inject into regional storage fields, increasing the likelihood of a very tight market when demand escalates this winter.

This summer's injection pace has been considerably slower than what is needed to fill Canadian storage fields back to historic norms. Injections have averaged 800 MMcf/d summer-to-date which is less than half of last summer's average, according to S&P Global Platts Analytics. The weaker injections are in line with what was averaged during the constraint-driven summers of 2017, 2018 and 2019.

The low injection rate has continued all season despite summer starting with a storage inventory well below historical norms. It has likely been driven by poor economics to inject. The cash-to-winter spread has averaged 12 cents/MMBtu this summer, well below last summer's 50 cents/MMBtu average spread. However, record heat and an outage in the US Northeast recently drove these economics into more extreme territory.

Prices across most of North America have strengthened over the past month causing cash-to-winter strip spreads to narrow. This has resulted in an already bleak injection environment in Western Canada. It has the potential to tighten AECO further this winter.

Henry Hub prices were up 85 cents on July 7 from their May average. AECO hub shot up with it as production faltered amid a blistering heat wave and strong demand.

The cash-to-winter strip inverted during this time, with the July 1 AECO cash price reaching 41 cents higher than the winter strip price as West Canada reported net withdrawals from storage at this time.

Prices have normalized the past few days as record heat subsides and an outage in the US Northeast that cut production by several Bcf/d has ended. But even with prices normalizing, the futures market shows injections could be even weaker the rest of this summer than the market was already expecting, according to Platts Analytics.

The average AECO balance-of-summer 2021 futures spread to the winter strip is now trending at its tightest level of the summer. The balance-of-summer has averaged 4 cents above the upcoming winter strip during the first seven days of July. This does not appear to be driven by a relatively weak month like July falling out of the average or maintenance news.

The relatively maintenance-free October gained quite a bit ground on the winter contract, as well. These recent shifts in the forward curves could lead to even weaker injections than Platts Analytics was anticipating this summer. Canada could enter this winter even further below historic norms than what was previously expected, should futures play out at their current prices.