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ANALYSIS: Winter storm looks to bring natural gas freeze-offs, lower supply to Midwest as demand spikes

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ANALYSIS: Winter storm looks to bring natural gas freeze-offs, lower supply to Midwest as demand spikes

Highlights

200 MMcf/d of Bakken supply at risk

Chicago prices likely to strengthen

Denver — Frigid temperatures settling across the western half of the US this week have the potential to prompt natural gas production freeze-offs, particularly in the Bakken Shale, and lower pipeline inflows at a time when large markets will be experiencing demand spikes.

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Bakken supply is expected to shrink at a time when areas around Chicago and Detroit will most need the support, increasing the region's reliance on natural gas in storage. US Upper Midwest demand is expected to jump 2.6 Bcf/d day over day to 22.5 Bcf/d on Jan. 27 before rising again to 23.8 Bcf/d on Jan. 28 as temperatures dip 11 degrees Fahrenheit below the five-year average to roughly 16 degrees.

The cold snap could present downside risk to Bakken Shale production as wind chill temperatures in the region hit minus 15 degrees, according to the National Weather Service, furthering the potential for freeze-offs. This cold could limit Bakken production available to help meet the demand spike.

So far this month, Bakken production has averaged 2.1 Bcf/d. Temperatures in Williston, N.D., however, are forecast to dip to an average of 3 degrees Jan. 27. The National Weather Service shows temperatures will reach as low as 1 degree with the wind chill around minus 15. Last January, when temperatures hit similar lows, Bakken production fell roughly 200 MMcf/d. The valley of the production dip typically occurs a couple days after the lowest temperature. This is likely to correspond with when demand peaks around Chicago and Detroit.

This cold snap also is likely to put a dent in inflows as the Northeast US faces a winter storm warning as well, pushing regional demand as high as 36.8 Bcf/d. Inflows to the Midwest from the Northeast have averaged 6.5 Bcf/d month to date.

The Upper Midwest has already seen imports from Canada dip. Canadian exports to the Midwest over the past seven days as of Jan. 27 are about 300 MMcf/d lower than the 14 days prior at 3.6 Bcf/d as West Canada's first sustained cold snap of the season has closed the price gap between AECO and Chicago, according to Platts Analytics.

Population-weighted temperatures in Western Canada averaged just under 23 degrees from Jan. 21-27, the coldest such stretch in the region this winter. This has boosted demand to an estimated 9.5 Bcf/d for a gain of about 1 Bcf/d over the 14 days prior. The increased demand for AECO has tightened the spread to the downstream Chicago hub to average 30 cents/MMBtu the past seven days from the 44 cents/MMBtu average of the 14 days prior.

Great Lakes Gas Transmission has made up most of the export decline, with exports averaging 1.2 Bcf/d over the same time frame, a decline of 200 MMcf/d. The cold weather is expected to persist for at least the next two weeks, which could keep pressure on AECO to continue cutting exports.

This surge in Upper Midwest demand with falling production and lower inflows should significantly strengthen Chicago as well, though. Month-to-date Chicago basis to the US benchmark Henry Hub has remained relatively weak at minus 9 cents/MMBtu. Platts Analytics, however, expects this could move into positive territory during this week's cold snap. This would incentivize stronger withdrawals from storage, with regional inventories currently standing at 678 Bcf, just 2.3 Bcf above last year.

This demand spike should flip the storage surplus to last year to a deficit. Higher Midwest demand appears likely to remain based on forecasts for colder weather in February and sustain the upside risk to Chicago for the coming weeks.