The need to keep a steady and sizeable rate of injections in Eastern Canada, so that inventories start the withdrawal season in the typical 260-270 bcf range, has lifted Dawn prices by $0.30/mmbtu y/y to $3.05/mmbtu. To hit its usual range, Eastern Canada will need to inject 1.2 bcf/d by end-October—we project that this rate will be met given that Rover is flowing a very steady 0.8 bcf/d across the border. Western prices have not seen the same strength. Despite a 125 bcf y/y deficit in the region, AECO-C prices have averaged just $0.93/mmbtu in August, down by 12 cents m/m. The Western storage gap persists despite a y/y output gain of 1.4 bcf/d in the WCSB in August to-date. Maintenance, which will continue into September, remains the key driver for both Western prices and storage. This informs our forecast for an end-October Western Canada carry of just 615 bcf, down by 105 bcf y/y and 60 bcf below the 10-year minimum.
After Eastern Canada recorded a net withdrawal from storage in April for the first time since 2013, and Dawn ended the month with inventories of just 35 bcf (-75 bcf y/y), the race has been on to refill storage sites before the heating season. The market has begun to respond to the reality that Dawn could end October with a storage carry of less than the seasonal range of 260-270 bcf if it does not keep a steady injection rate of 1.2 bcf/d. Dawn’s closing price has averaged $3.05/mmbtu so far this month, up by $0.28/mmbtu m/m and by $0.30/mmbtu y/y, and has flipped its July average of a 2-cent discount to Henry Hub to an 11-cent premium so far in August. Dawn should remain supported through the heating season as well, though increased flows of US gas limit our forecast for Dawn prices to just a five-cent premium for the upcoming winter.
While Dawn still needs to send 1.2 bcf/d into storage through the end of the injection season to hit a 260 bcf carryout, the current pace of injections since the start-up of Rover’s second mainline has made this more likely. Dawn’s y/y storage gap currently stands at 35 bcf, an improvement over the 60 bcf deficit faced when Rover Phase 2 first started flowing on 1 June. Dawn has received 0.8 bcf/d from Rover via the connected Vector Pipeline on every day since. If that level of Rover imports continues into October, a month with a five-year average injection rate of 0.5 bcf/d, the y/y storage deficit could evaporate quickly. Enbridge’s 1.5 bcf/d NEXUS pipeline, which will also connect to Vector, is on track for an October in-service date, and will function as an additional conduit for winter deliverability. These flows underpin our forecast that Eastern inventories will hit 260 bcf for end-October carryout, albeit just barely.
Western Canada has not seen the same support, as AECO-C endured another month of low, volatile prices. Average closing prices for the index are down by 12 cents m/m to $0.93/mmbtu in August so far, dipping as low as $0.45/mmbtu on 17 August. That low was driven in part by maintenance, as work on the Edson Mainline affecting 0.4 bcf/d was scheduled from 17-27 July but dragged on until 19 August. This trend will continue, as the Grand Prairie Mainline undergoes its third bout of upgrades this summer from 9-18 September, affecting up to 0.6 bcf/d in flows.
The ongoing work is also impairing net exports of gas from Canada to the US in the west. The Westcoast Energy pipeline system connects to the Northwest Pipeline at the Sumas border crossing in Washington state, and the point has a marked drop in flows since maintenance began on various upstream compressor stations on 7 August. Exports to the US through Sumas have fallen by 0.3 bcf/d m/m to 0.9 bcf/d thus far in August, and have only topped 1.0 bcf/d once since the work started. Flows at the point are not likely to recover until October at least, as Westcoast’s 0.3 bcf/d Fort Nelson gas plant will undergo a two-week complete shutdown starting on 18 September. This, combined with the new flows on Rover and NEXUS, supports our view that net exports to the US will fall by 0.2 bcf/d y/y for the rest of 2018, to 5.3 bcf/d.
Canada’s torrid production pace is also helping to depress prices. Our flow data, which covers approximately 90% of the WCSB’s production, show sample August output of 14.7 bcf/d, a y/y increase of 1.4 bcf/d. Only six individual days during this injection season have seen production fall below 2017’s counterpart, four of which (4-7 May) occurred during the Grand Prairie’s first bout of work, which cut flows by up to 0.7 bcf/d. However, signs pointing to 2019 y/y output gains are few and far between. While Canada’s current rig count of 229 is up by 12 y/y—after bottoming out during the mud season in March at 57 below 2017’s total—drilling activity has yet to pick up. The 278 total wells drilled year-to-date in 2018 in British Columbia is lower y/y by 60. Data through June shows that the 444 gas wells drilled in Alberta this year is down by 190 y/y.
The potential for an historical low end-October carryout looms over Western storage, even if AECO prices have not responded like those at Dawn. Western inventories of 575 bcf are currently 125 bcf below last year’s level. While Western Canada does not have the same historical narrow range for an end-October carryout as the east, the west will need to average injections of 1.2 bcf/d to hit the 10-year minimum of 675 bcf in storage to start the heating season. The pace of summer injections makes this unlikely. NGTL’s daily storage receipts indicate that Alberta has seen its highest injections of 2018 in August, but of only 0.6 bcf/d, 0.1 bcf/d above June and July. Maintenance will continue to support the Western inventory gap, leading to disruptions to interruptible gas transport into storage. We forecast an end-October carryout of just 615 bcf in the West because of the ongoing work schedule.
With work continuing this late into the injection season, the possibility of Western Canada avoiding a 10-year minimum end-October carryout is virtually non-existent. While low inventories have not created a floor under AECO prices during the injection season, they should provide basis support during the upcoming winter. Last winter saw AECO hit a high of just $2.88/mmbtu on 29 December, even as Henry Hub reached $6.88/mmbtu and Dawn peaked at $9.00/mmbtu the same week. If a blast of cold weather similar to last winter is felt in Western Canada, inventories will not be able to provide an adequate cushion against such price spikes in the event of a string of cold days.
|Fig 1: Dawn basis price, $/mmbtu||Fig 2: WCSB production, bcf/d|
|Source: Reuters, Energy Aspects||Source: Ventyx, Energy Aspects|