Big October chill puts US Midwest gas market on alert as storage deficit widens

Unseasonably cold weather across the central US this month is resetting the outlook for winter gas prices at Midwest hubs as storage injection demand falters, leaving regional inventories at risk.

Month to date, population-weighted temperatures across the Upper Midwest have averaged a chilly 52.8 Fahrenheit, or about 4 degrees below normal, data from S&P Global Commodity Insights shows.

Lower temperatures this October have boosted Midwest residential-commercial gas demand to about 5.4 Bcf/d, or its highest month-to-date average on record. On Oct. 19, heating demand from Midwest homes and businesses surged to over 8.2 Bcf/d, hitting a high typically not seen before November.

Stronger spot gas demand across the Midwest this month has taken a toll on storage injections there.

From Oct. 1 to date, regional injection demand has dipped to about 3.4 Bcf/d, which is down from an average 4.6 Bcf/d in September. Although Midwest injection demand is trending just 300 MMcf/d below the prior five-year average this month, inventories are now widening an already sizeable deficit. On Oct. 19, regional stocks were estimated at 885 Bcf, or about 76 Bcf below normal, S&P Global data showed.

With little more than two weeks remaining for the current injection season, Midwest inventories could be poised to enter winter at their lowest in five years or more, putting the region's gas markets on alert.

Prices

Strong spot gas demand in the Midwest this month has already boosted cash basis prices at regional hubs, helping to fuel a rise in net gas deliveries into the region.

At the Chicago city-gates, the cash discount to Henry Hub has narrowed to an average 49 cents over the past week, up from a discount of 97 cents in September and more than $1.70/MMBtu in early October. At the MichCon city-gate, similar cash discounts in September and early October have also narrowed, with the location trading about 66 cents below Henry Hub over the past week.

With regional gas storage inventories now at risk, the surge in prices has also spread to the forward market amid growing alarm over the outlook for Midwest gas supply this winter.

At the Chicago city-gates, basis premiums for November and December have rebounded since the start of this month, gaining about 10-20 cents. The largest basis gain has accrued for January 2023 when a lingering storage deficit could prove more consequential. Since the start of this month, Chicago basis prices for January are up roughly 40 cents, with the hub now trading at a $1.05 premium to Henry Hub, Platts M2MS forwards data shows.

Stronger basis prices in the Midwest this winter could have a knock-on effect for neighboring gas markets. Over the past week, net outflows to the US Southeast have reversed direction, with the region now supplying a net 210 MMcf/d to the Midwest in the past seven days. Last month, the Midwest supplied a net total of nearly 420 MMcf/d to the Southeast, S&P Global data shows.