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Canada exports to US on Great Lakes likely to average 10-year high this summer

Highlights

Exports averaging 300 MMcf/d more than last year

Weaker storage injections also look to boost AECO

Higher year-over-year contracted export capacity on Great Lakes Gas Transmission pipeline combined with lower natural gas injections in Alberta looks likely to boost AECO hub prices during the summer and into winter.

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Data confirms Great Lakes is heavily contracted for exports this summer. The pipeline links Western Canada's natural gas basins to population centers in the US Upper Midwest. Additional contracts were signed between Q1 2021's Index of Customer data release and the latest Q2 release.

There are now 1.75 Bcf/d of contracts to export from Western Canada to the US Midwest on Great Lakes through April, and 1.72 Bcf/d contracted for the remainder of summer once a relatively small contract rolls off at the end of the month.

The 1.72 Bcf/d of contracts is likely to drive the strongest summer of exports on Great Lakes since pre-2010. Exports this injection season are already the strongest recorded in more than a decade. S&P Global Platts Analytics data shows month-to-date exports on the line are averaging 1.48 Bcf/d compared to 1.08 Bcf/d last year and 988 MMcf/d for the five-year average.

With more than 1.7 Bcf/d of exports contracted, Platts Analytics expects 1.5 Bcf/d of exports will likely be averaged on the pipe this summer.

With exports on Great Lakes this strong, combined with open space on Northern Border Pipeline pulling on AECO as well, Platts Analytics expects the AECO hub in Alberta will face upward pressure all summer and even into next winter.

AECO cash strengthens

Export room on Northern Border, coupled with strong contracts on Great Lakes, is driving stronger cash prices at AECO and contributed to the daily cash to winter 2021-22 spread averaging only 20 cents so far this summer, which is less than half of last summer's average.

As a result, after a strong start to the injection season, builds have been faltering and are averaging just 550 MMcf/d this season, or about half of last summer's average. Models forecast that if these weak injections continue it will lead to unusually low inventories by the end of summer, which will help boost prices next winter.

However, production gains and a loss of injection demand are driving a wider spread between AECO and Chicago this summer. Exports on Great Lakes are up 400 MMcf/d this summer over last due largely to stronger contracting, but the AECO market is still looser summer over summer, partly due to production on the NGTL system up 400 MMcf/d.

While these two factors would cancel each other out on their own, injections are down over this time last summer. When counting total system demand, including actual demand as well as all outflows from the NGTL pipeline system, AECO has been about 300 MMcf/d longer this summer to date than last.

This explains why AECO has averaged a US 34 cent/MMBtu discount to Chicago so far this summer, down from 27 cents in April 2020. The West Gate will lose about 100 MMcf/d of export capacity in May over April, but the key factor to watch in regards to May prices will be production, and whether or not these strong levels persist when the spring breakup typically begins to take hold and drive production lower, according to Platts Analytics.