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Warmer-than-normal start to Canadian winter could keep gas inventories high

Highlights

Winter-to-date temps 5 degrees above normal

Latest forecast shows above-normal temps continuing

Denver — Despite early weather forecasts predicting a colder-than-normal Canadian winter, temperatures so far are averaging well above normal, sapping demand and decreasing the likelihood of drawing down the region's massive storage inventory, or of AECO hub inching closer to Chicago prices.

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Despite stronger than expected Canadian exports to the US Midwest and natural gas use for oil sands production at all-time highs, warm weather has sapped demand. This is causing storage inventories to trend above the five-year high while prospects for cold weather wane, according to S&P Global Platts Analytics.

Exports to the Midwest are looking more like Western Canada's best chance to draw down high inventories, which would likely prevent AECO from tightening to Chicago any more than it already has.

Population-weighted temperatures in Western Canada have averaged 33 degrees Fahrenheit so far this winter, the warmest start to winter in nearly a decade and 5 degrees above normal. This has total demand trending below years past despite demand in the oil sands up about 200 MMcf/d winter over winter, according to Platts Analytics.

Earlier forecasts suggested that despite Western Canada storage trending so high, cold weather would still pull inventories below normal. This was based on forecasts from the Canadian government predicting a cold second half of winter. The government's forecasts now indicate warm weather will persist a while longer, with cold weather showing up toward the end of winter, but only for the lower half of British Columbia. Alberta is now forecast to finish winter with temperatures around normal.

In the short term, temperatures are forecast to be about 7 degrees warmer than the 10-year normal through Jan. 20, likely leading to lower demand and storage withdrawals, according to Platts Analytics.

West Canada's most bullish factor looking to the rest of the winter may be exports to the Midwest, which have been exceptionally strong, particularly since December. Exports to the Midwest have been well in excess of Platts Analytics forecast. If exports to the Midwest continue to exceed the forecast by 400 to 500 MMcf/d, this could offset warm weather and bring inventories down by the end of winter. Platts Analytics estimates that every degree above normal cuts West Canada demand by about 150 MMcf/d.

Barring cold weather, expect to see prices at the AECO hub fail to rally. AECO spot prices were at $1.96/MMBtu as of Jan. 6, which was 61 cents below Chicago city-gates.

Should normal temperatures return in late January and increase demand while Midwest exports persist, West Canada inventories could end winter at 270 Bcf, or about 55 Bcf below the five-year average.