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West to trump East in price, flows this summer

By Patrick Badgley and Samantha Santa Maria

March 17, 2014 - After an historic winter that saw gas prices in the Northeast and Midwest hit record highs and supplies from the Rockies and western Canada increasingly head eastward, forward assessments now indicate stronger year-over-year Western gas prices that will create the incentive to flow more gas westward this summer, a Platts analysis shows.

(See chart: Summer gas forward package comparisons)

Even as a record number of heating degree days depleted storage inventories to historical lows across North America, it appears expectations of continued rampant production out of the Northeast -- namely the Marcellus Shale -- to fill regional storage and satisfy summer power demand are significantly depressing markets from the Northeast to the Upper Midwest to the Rockies, Platts M2MS data shows.

Analysis continues below...

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On the West Coast, however, drought conditions in California and expected growth in power burn amid concerns that storage will not fill up as quickly as Eastern and Midwest markets are apparently propping up summer forward prices over year-ago levels.

"The big difference between nearly every part of the country and the West can be summed up in two words: Marcellus Shale," a financial trader said. "Markets that are going to get Marcellus supplies are banking on that production taking out price premiums."

"The Marcellus is going to displace Western Canadian, Rockies and Midcontinent gas this summer," another trader said. "You put that up against some strong hydro conditions in the Pacific Northwest and you get depressed markets just about everywhere you look -- except the West Coast."

The summer forward package for the Pacific Gas & Electric city-gate has averaged at plus 45.8 cents/MMBtu so far this year, compared with its summer 2013 average price of 26.75 cents/MMBtu during the same period a year ago, Platts data shows.

By contrast, in the Appalachian production region, Dominion South's prompt summer package is averaging at minus 85 cents/MMBtu so far this year, vs. the year-ago average of minus 7.05 cents/MMBtu.

These stronger year-over-year values and spreads should reverse the eastern flow dynamics that have been in place this winter.

Moreover, projections for summer demand in the Southwest appear quite bullish. Platts unit Bentek Energy is projecting regional demand at 8.2 Bcf/d, about 220,000 Mcf/d above last year's level.

As such, the summer forward package for Northern California consuming hub PG&E city-gate has averaged 66 cents above Northwest Pipeline-Rockies for the year-to-date, compared with 42 cents last year, according to Platts data.

Bentek data shows inflows from Ruby Pipeline to the PG&E system at about 741,000 Mcf/d last April through October. With PG&E receipt capacity from Ruby of 1.5 Bcf/d and the wider price spreads, there is room for those volumes to grow this summer.

That would be a reversal from the last few months, when Ruby flows to PG&E have averaged only 454,000 Mcf/d, down from about 1 Bcf/d in the same period last year.

Meanwhile, the prices for summer forwards at AECO-Alberta in western Canada have also dropped to a deeper discount to PG&E, averaging about 90 cents so far this year, compared with 52 cents last year. That discount should give Rockies gas some competition for the Northern California market.

Midwestern consuming markets have largely offered more attractive spreads for western producers this year, but summer forward prices indicate an end to that advantage this summer as cold weather-driven demand in the Midwest gives way to more mild conditions.

That was illustrated in the past week when the Chicago city-gates April forward price flipped to a 20-cent discount to PG&E Thursday from a 20-cent premium on March 7.

Still, early on in the summer, western Canadian flows to the Upper Midwest and eastern Canada could improve year-over-year early on in the summer, a Midwestern trader said.

"I do think we will see elevated deliveries at least early on this year," the trader said. "Once we get into the real heat, though, I would think more of that will stay west. Hard telling really as it is dependent on so many things."

Amid low storage inventories, the massive Dawn, Ontario, storage hub has also been an attractive market for western gas.

Despite falling to a historical low of 14.5 Bcf, and with a similar inventory situation for Michigan storage facilities, Bentek anticipates Dawn storage inventory will fill to near-normal levels by November 1.

It currently is just 11.3% full, according to data from Dawn's operator Union Gas.

A new toll structure implemented last year for TransCanada's Canadian Mainline could contribute to increased flows from western to eastern Canada, despite a tighter price spread for summer forwards packages.

Platts data shows Dawn summer forwards have averaged about 63 cents above AECO year-to-date, compared with a 71-cent premium last year.

So far this year, flows at Empress, Alberta -- an indicator of West-to-East flows --- have averaged about 3.7 Bcf/d, compared with about 2.5 Bcf/d a year earlier.

But the Upper Midwest and eastern Canada are not the only regions short on storage as the calendar prepares to turn to injection season.

US gas in storage fell 195 Bcf to 1.001 Tcf for the week that ended March 7, the Energy Information Administration said Thursday. That brought working gas inventories to a 958-Bcf deficit to the year-ago level, while the deficit to the five-year average climbed to 858 Bcf

Next page: Hydro forecasts do about-face

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