Canada – Red Dawn

Published at 15:34 14 Jun 2019 by . Last edited 11:18 22 Aug 2019.

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Consistent imports from the US Northeast into Eastern Canada are widening Dawn’s basis discount to Henry Hub. Dawn is trading on average $0.20/mmbtu below Henry in Q2 19, the biggest quarterly discount for the index in a decade, as Eastern Canada is on track to end June with a 15 bcf y/y inventory surplus at 125 bcf. The ease with which the region will hit its usual 260+ bcf end-October carryout, representing healthy pre-winter inventories, drives our forecast for Dawn to sink to an average $0.25/mmbtu discount for the remainder of the injection season. The strength of imported supply from the US—which has stabilised now that Dawn has restored a five-cent premium to key US Midwest hubs to attract cross-border flows—also underpins our forecast. Western Canadian storage is highly stratified by province, with Alberta the only province at a y/y deficit, of 65 bcf. Daily Q2 19 Alberta storage injections have been up y/y but low compared to five-year averages. We forecast AECO-C will average a $1.50/mmbtu discount to Henry Hub for the rest of the injection season, $0.50/mmbtu narrower y/y, on the need to refill storage.

Dawn prices have plunged in Q2 19. April and May saw consecutive ten-year record-low basis discounts to Henry Hub, of $0.17/mmbtu and $0.24/mmbtu respectively. June is on track to match that May level, making this a shoo-in for the quarter with the lowest Dawn prices in a decade (no previous quarter in that time frame had averaged a discount wider than six cents). The widening gap is the result of healthy Eastern Canadian inventories that have left little doubt that Dawn will hit its customary 260+ bcf end-October threshold, representing nearly full pre-winter storage, in part thanks to a deluge of supply from the US Northeast.

Eastern Canada is on pace to end June with inventories of 125 bcf, a y/y surplus of 15 bcf. US imports underpin much of the current injection rate, with just under 1.0 bcf/d reaching Dawn from the US Northeast via the Vector pipeline in Q2 19. In 2018 Dawn used an influx of US gas to hit the 260 bcf level by end-October, despite starting from a lower inventory level. This year, given our expectations for the same US inflow, we project Dawn to continue at an average $0.25/mmbtu discount to Henry Hub for the rest of the injection season.

Factors that might have once propped up Dawn prices are failing to make such an impact amid increased US supplies. NGTL maintenance restricting WCSB flows to the east has had no effect on Dawn injections thus far during the busiest season for pipeline repairs and upgrades. The Woodenhouse compressor station went offline for maintenance on 26 May. The unscheduled outage restricted up to 1.0 bcf/d of capacity through the NGTL system’s East Gate, but Dawn still injected 1.6 bcf/d in the week ending 31 May, its largest May stockbuild since 2009. Even with less Canadian gas available, Rover deliveries onto Vector were flat that week at 0.9 bcf/d, with what NGTL gas that could get east given the restriction filling in the rest. Dawn prices were unmoved by the Woodenhouse work, rising just one cent d/d to $2.35/mmbtu on 27 May.

Fig 1: Dawn-Henry Hub vs Dawn storage y/y, $/mmbtu, bcf Fig 2: Western Canada y/y storage, bcf
Source: Bloomberg, Refinitiv, Energy Aspects Source: NEB, Energy Aspects

Even as Dawn prices slide, they have regained their premiums to key Midwestern hubs that allow Eastern Canada to draw gas from the US (see Monthly: Canada – Borderland balances, 29 April 2019). After averaging a $0.12/mmbtu discount to the Chicago Citygate in March, which slowed late winter cross-border flows and eroded Dawn’s y/y storage surplus (see Fig 1), Dawn has flipped back to a five-cent premium to Chicago in Q2 19. The premium re-emerged as Midwest prices fell as that region resolved its y/y storage deficit. Current US Midwest inventories of 436 bcf are up by 99 bcf y/y, a reversal from the region’s 67 bcf y/y deficit at the start of March.

Western Canada’s storage situation has improved since closing the winter at a 50 bcf y/y deficit with 420 bcf in inventories. That storage deficit is highly stratified by province, though. British Columbia ended May with inventories of 55 bcf, up by 20 bcf y/y, while Saskatchewan’s 20 bcf in stocks was in line with 2018’s benchmark. That leaves Alberta, which has a 65 bcf y/y deficit after enduring brutal cold last winter that forced heavy stockdraws (see Monthly: Canada – A dream of spring, 27 March 2019). Daily NGTL storage injections in April and May of 0.35 bcf/d were marginally improved y/y, by 0.1 bcf/d, but were also just half the five-year average for the same timeframe. Daily June NGTL injections of 0.25 bcf/d thus far are down by 0.2 bcf/d y/y, however.

We forecast AECO will sit at an average discount to Henry Hub of $1.50/mmbtu through the rest of the injection season, $0.50/mmbtu narrower y/y, on the need to fill storage volumes. Further minor support for Western prices will come from a better y/y maintenance situation, with no disruptions to interruptible transport currently in NGTL’s scheduled work. This should allow Alberta to close its y/y storage gap to 50 bcf by the start of the next heating season, though this would still represent a decadal low carryout of just 465 bcf. It will take a more sustained period of stronger injections to refill Alberta inventories after the past few brutal winters.

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