Stout Canadian supplies of natural gas in storage following a mild winter and robust levels of production continue to pressure prices north of the U.S. border.
Cash prices in Western Canada, the region that is home to the country’s natural gas output, were weak all spring and remain so at the start of the summer cooling season. Westcoast Station 2 traded below C$1.00/GJ through much of June. The hub averaged just C78.0 cents on Monday, down from prices above C$2.00 in late June and early July a year earlier. A similar slump has endured at NOVA/AECO C, where prices clocked in at C76.0 cents on Monday.
Canadian gas production hit record levels during the winter months, comfortably surpassing 18 Bcf/d, according to RBN Energy LLC. Producers ramped up in anticipation of increased export demand with the pending LNG Canada, the Shell plc-led liquefied natural gas export project in British Columbia. That project is targeting final commissioning this year. But above-average temperatures across a majority of the heating season sapped demand and minimized needs to withdraw gas from storage.
This put inventories at robust levels coming out of winter. While production dipped modestly during the spring – thawing ground conditions slowed the movement of heavy drilling equipment – so too did demand because of benign shoulder season weather. Canadian gas storage levels were at 254 Bcf, or 64%, above their five-year average in late June, according to EBW Analytics Group senior analyst Eli Rubin. The excess was more than three times the Lower 48’s surplus of 21% for the final week of June.
“Canadian gas storage has already reached 40 Bcf above peak November 2022 levels, and is within 35 Bcf of its 2021 peak,” Rubin said.
“Canada may face ratcheting supply/demand fundamentals later this summer if LNG Canada begins commissioning feed gas flows or wildfires restrict supply (as they did last summer),” he added. “Nonetheless, huge surpluses are ready to meet any increases in gas demand or price.”
This has knock-on effects for supply in the Lower 48. When Canadian gas is cheap, U.S. buyers in northern markets often import more of it to capitalize on discounts. Canadian imports to the United States are in fact elevated. Wood Mackenzie’s estimate at the start of this week put the seven-day average at 6.4 Bcf/d, up more than 1 Bcf/d from a year earlier.
The added supply can tame U.S. prices, including in Pacific Northwest markets that are close to gas produced in Western Canada.
Malin in Oregon, for example, shed 22.5 cents on Monday to average $1.895/MMBtu. That was above the national average of $1.655, but far below the hub’s July 2023 highs near $5.00, according to NGI data. Northwest Sumas in Washington state dropped 68.5 cents to average 86.5 cents – one of the lowest price points in the country. That hub also approached the $5.00 level in July last year.
Futures Market
Excess supply also weighs on the minds of futures traders, Rubin said. “Any weather-induced mid-summer upturn in Nymex gas futures may struggle to extend gains into early fall,” if storage levels remain above the five-year average in both Canada and the Lower 48 when the cooling season culminates.
Already, prices are struggling to find momentum. Prompt month futures lost ground over the past two weeks. The August contract moved to the front of the curve last Thursday and posted a loss that session as well as the next. It dropped another 12.3 cents on Monday and settled at $2.478. It shed a few more cents intraday Tuesday.
While cooling demand is widely projected to prove above-average this month, with National Weather Service forecasts for intense heat across the southern two-thirds of the country, swaths of the North this week are seeing chilling rains. This, combined with U.S. production that climbed from spring lows in the mid-90s Bcf/d to 100 Bcf/d to start July, galvanized price bears, Mobius Risk Group analysts said. The Fourth of July holiday also tends to dampen demand.
“Prospects for reduced industrial demand during a holiday week and slightly cooler temperatures for the northern third of the Lower 48 U.S. in the first week of July supported” increased “selling activity,” the Mobius team said.
Meanwhile, official natural gas production data from the Canada Energy Regulator is typically released on a two-month delay, so it is not yet known if output is back near record levels to start the summer.
But RBN analyst Martin King noted that, for the week ended June 28, Baker Hughes Co. reported the Western Canadian gas-directed drilling rig count rose two to 59. The tally was up one from a year earlier, when production exceeded 17 Bcf/d. Production last year was briefly slowed by wildfires, but it rebounded over the summer and averaged above 18 Bcf/d for eight months in 2023.
“The gas rig count has posted small increases for three consecutive weeks, suggesting a modest seasonal increase is underway,” King said. “But further large advances are unlikely as producers remain reluctant to aggressively increase drilling due to low benchmark gas prices.”
