Viewpoint: Low demand weighs on midcon winter gas

Winter natural gas forward prices at key US midcontinent hubs are trading at a discount to the Henry Hub as new pipelines and high inventories following low demand in the first-half of 2017 have eased supply concerns.

The Chicago Citygates winter strip that includes prices from November 2017 through March 2018 is averaging a 4¢/mmBtu discount to the Henry Hub futures contract. The winter strip at Mich Con Citygates is averaging an 8¢/mmBtu discount, according to Argus forward curves.

Chicago and Mich Con were near parity with the Henry Hub in the spot market last winter, narrowing from 7¢/mmBtu and 8¢/mmBtu premiums in the winter of 2015-16, respectively.

The basis in those markets shifted to discounts for this winter as regional inventories stayed above the five-year average this year following low weather-related demand. Expectations are also high that new pipeline capacity will allow more low cost gas to reach the midcontinent market, despite a likely increase in demand.

Demand for gas in the midcontinent in the first half of 2017 averaged 12 Bcf/d (340mn m³/d), down by 4pc from the year-earlier period primarily on lower power sector demand because of higher prices, according to BTU Analytics. The prompt-month Nymex futures contract in the first half of the year averaged at $3.10/mmBtu, up by 46pc from a year earlier.

Power generation from natural gas in the midwest census region in the first half of 2017 should average 281GWh/d, down by 20pc from a year earlier, according to the US Energy Information Administration (EIA).

The mild winter earlier this year also curbed gas demand for heating, resulting in smaller-than-average storage withdrawals. Midwest stocks in the week ended 14 July reached 733 Bcf, 7.6pc above the five-year average, according to the EIA.

Gas-fired generation in the second half of 2017 should increase to 365GWh/d, 1pc higher than the year earlier and 30pc more than the first half, according to the EIA's Short-Term Energy Outlook. Heating demand should also increase this winter compared to the previous winter on expectations for more normal weather.

Improvements in pipeline takeaway capacity is also expected to help put downward pressure on midcon prices this winter.

Energy Transfer's Rover pipeline is expected to be able to move up to 3.25 Bcf/d of gas from western Ohio to Michigan for eventual delivery to Union Gas' Dawn trading hub in Ontario, Canada before this winter. Rover has faced some construction delays for Phase 1, which was supposed to come online in July, but the pipeline developer does not anticipate any delays to the projected 1 November full in-service date.

New agreements on TransCanada's Mainline that lower tolls is also expected to bring up to 1.4 Bcf/d additional gas to the Dawn hub starting 1 November. Some of that gas could also reach US midcontinent and northeast markets.