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Analysis: AECO hub rallies near Chicago prices on rising Alberta demand

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Analysis: AECO hub rallies near Chicago prices on rising Alberta demand

Highlights

Weather, inventory dearth driving demand

Exports to Midwest look to remain low

Denver — AECO hub basis has recently surged to prices not seen in years during the shoulder season as cooler weather drives up demand all while Alberta has also started injecting higher volumes of gas into storage.

The basis almost reached parity with the Chicago hub over the past several days. This stemmed from AECO's need to compete with Chicago for supply due to stronger demand, according to S&P Global Platts Analytics. At the same time, Alberta is injecting at multi-year highs. AECO's tightening has also led to a drop in outflows to the Midwest.

A recent amendment to NOVA Gas Transmission system's tariff policy allows for higher daily storage injections. Alberta is currently building storage more rapidly than recorded during the peak of past two injection seasons.

Total demand on NGTL's system, including injections, averaged 5 Bcf/d in September, according to Platts Analytics. Temperatures have dropped 10 degrees this month, also spurring demand. Still, the majority of the increased tightness has resulted from stronger injections. In total, demand and injections have tightened NGTL and AECO by about 0.8 Bcf/d in October compared to September.

Production has gained 0.5 Bcf/d so far in October over September. During the summer, AECO regularly traded $1/MMBtu below Henry Hub, resulting in producers shutting in wells. The boost in production likely results from operators bringing some of those wells back online due to AECO's recent increased access to storage, according to Platts Analytics.

AECO basis averaged more than $2/MMBtu below Henry Hub during September. It has averaged only 44 cents below over the past seven days. AECO is currently only 5 cents behind Chicago. It averaged $1.61 lower than Chicago last month.

The extra production has still not met AECO's increased demand, however, so flows to the Midwest have slowed, as AECO's recent price jump has driven weaker NGTL system outflows at Empress.

Empress outflows are averaging just 2.6 Bcf/d so far in October, dipping as low as 2.3 Bcf/d. This is about a 0.2 Bcf/d drop this month from September. Great Lakes Gas Transmission has accounted for most of it. Empress outflows to Eastern Canada along TC Energy's Mainline have remained flat since September. Great Lakes on the other hand, which delivers gas from Alberta to Upper Midwest markets in the US, has seen its outflows drop considerably.

The reduced exports flows at Empress could be a sign of what will continue throughout the winter. Despite rapid injections and aggressive builds over the past several weeks, Alberta still looks to finish injection season with stocks well below historical norms.

A strong production rebound in Alberta early this winter also looks unlikely since the 1.7 Bcf/d North Montney Mainline's in-service date was recently delayed from December 15 until mid-January.

If production fails to grow, outflows at Empress, and to US Midwest markets, could be reduced further to help meet AECO demand.

-- Brandon Evans, bevans@spglobal.com

-- Richard Frey, richard.frey@spglobal.com

-- Edited by Debiprasad Nayak, newsdesk@spglobal.com