Weak Canadian natural gas prices, high inventory boost exports to US

Net flows of natural gas from Canada to the US have picked up in July despite a decline in Canadian production as high storage inventories continue to weigh heavily on cash and forward prices in Western Canada.

Canadian exports have averaged around 6.5 Bcf/d July 1-25, up from 6 Bcf/d in June and 5.7 Bcf/d in July 2023, data from S&P Global Commodity Insights showed.

Stronger imports from Canada have somewhat dulled the effects of production cuts in the US this summer. US production has fallen 1.9 Bcf/d year over year in summer 2024, but total supply has been only 1.2 Bcf/d lower thanks to increased flows from Canada, Commodity Insights data showed.

Flows have held up this month despite a decline in Canadian gas production because of hot weather. "Temperatures this July have been testing 2021's high water mark and field gathering facilities, which are primarily designed to withstand freezing winter temperatures, are struggling," Ian Archer, associate director at Commodity Insights, wrote July 25.

Canadian production has dropped to an average 16.8 Bcf/d July 1-26, down from 17.5 Bcf/d in June and around 18 Bcf/d in July 2023, Commodity Insights data showed. But it has picked up in recent days as temperatures eased and averaged 17.5 Bcf/d July 26.

With production on the decline and exports on the rise, cash prices at Canada's AECO hub have recovered somewhat in July but have still been more than $1/MMBtu below Henry Hub, which itself has been weak and hovering around the $2/MMBtu mark.

This trend is expected to continue for the rest of the summer. On the forward market, the August-October AECO monthly contracts were priced at an average of just 75 cents/MMBtu and at an average basis discount of $1.35/MMBtu, Platts M2MS data showed July 25. Platts is part of Commodity Insights.

Outlook

An exceptionally mild winter left Canada with a huge storage surplus and that has weighed on prices and is freeing up extra gas to export. The weaker production and robust exports to the US may have helped to limit storage injections this month, but inventories are still "likely to reach very full levels by the end of October," Archer said.

The Canadian market could tighten next year as LNG feedgas demand picks up. The Shell-led 14 million mt/year LNG Canada project is scheduled for startup by mid-2025. It is already in the early stages of commissioning and is expected to introduce fuel gas to the facility soon, a senior executive of the project developer said(opens in a new tab) in June.

With inventories expected to be close to full going into winter, Canada is likely to carry a storage surplus into 2025, which should "dampen the price impact of nascent LNG exports," Commodity Insights gas analysts said in their latest short-term outlook July 24.

But flows to the US can be expected to decline in 2025 and 2026 as "as the ramp-up of LNG Canada Phase 1 temporarily outstrips Western Canadian production," the analysts said.