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Upcoming NGTL maintenance looks to prompt volatility at AECO hub


AECO cash averages 7-year high this summer

Price might drop as low as $2/MMBtu or less

AECO hub has posted some of its best pricing in years this summer, but maintenance to Nova Gas Transmission Pipeline's East Gate could bring sharp volatility and weakness starting as soon as the week of July 26.

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The maintenance could persist a month or more. During this maintenance, AECO prices could fluctuate from day to day as the system flips back and forth between unconstrained and constrained.

When the system is constrained, AECO will need to fall low enough to force production to shut in. Given AECO's recent strength of Western Canada production, AECO could need to fall well below its current level of USD $3.00/MMBtu to possibly $2.00 or less to induce producers to shut in.

With the end of July approaching, the Nova Gas Transmission Ltd.'s East Gate restrictions are drawing near. AECO cash prices are seeing their best summer since 2014, averaging $2.62/MMBtu this summer-to-date and more than $3.00 month to date as of July 23. However, volatility and weakness appear likely as soon as July 26.

S&P Global Platts Analytics expects the likelihood of volatility to continue at least through Aug. 24. However, it could persist into early October as well due to constraints in the Upstream James River area.

Since the start of June, and discounting the end of June when massive, heat related, production drops caused big changes in what was flowing through the East Gate, day-over-day drops and increases have averaged 200 MMcf/d, with some days considerably higher than this.

Some of the factors influencing the East Gate include how much is flowing out of the West Gate, and how much production is delivered into NGTL on a given day. Another factor affecting the East Gate this summer has been inflows from Westcoast Pipeline, and there is no clear pattern to how much gets delivered to NGTL on a given day.

On average, Platts Analytics' forecast has been accurate. It projected that from April 1 through July 22, 4.35 Bcf/d would flow through the East Gate. NGTL data indicates an average of 4.39 Bcf/d has actually flowed through it. However, actual flows through the East Gate have oscillated around the Platts Analytics' forecast. This highlights why it will be difficult to predict, from day to day, how AECO will act during the heavier restrictions.

Considering AECO is currently trading above $3.00 when unconstrained, and the cheap economics of West Canada producers, it could take AECO falling well below $2.00 to convince producers to shut in wells if East Gate capacity is cut. AECO could see substantial volatility as the East Gate flips between days where cuts are needed and days they are not needed.