Got Me Under Pressure - Canada's Gas Market Could Test Storage Limits This Summer

The Canadian natural gas market has exited the most recent heating season in reasonable shape. Storage withdrawals were below average thanks to mild winter temperatures, but overall storage levels at the end of the season were not too far out of line with the five-year average thanks to below-average storage levels in the west more than offsetting above-average storage levels in the east. However, Canadian gas storage may be facing a most unusual test this coming summer as storage injection activity will be influenced by reduced gas demand in the U.S. due to COVID-19 disruptions, as well as the potential for similar pandemic-driven weakness in homegrown demand, especially in Alberta’s gas-intensive oil sands. How the various pushes and pulls on gas flows play out this summer could very well determine if Canadian gas storage might test capacity limits this injection season. Today, we consider this possibility.

The natural gas market in Canada has had to deal with a laundry list of issues in the past half-dozen years: insufficient pipeline egress capacity, rule changes on its largest domestic pipeline system in Alberta, loss of market share in the U.S., a domestic supply resurgence in recent years, followed by a decline in 2019, and too many instances of severely depressed, near-zero prices for a good part of summer 2019. Our seven-part blog series Get Me Out of Here discussed many of the pipeline egress issues, while more recently, Don’t Stop and Fixing a Hole painted a picture of a Canadian natural gas market that was looking more positive this year than in the past few years. That better outlook was thanks to more pipeline egress out of the supply areas and favorable rule changes to the Alberta gas pipeline system, with the end result being much-improved spot and forward prices for AECO, the Western Canadian gas price benchmark.

Alas, that good news didn’t seem to last long. The energy complex as a whole is now facing intense uncertainty from the recent oil price crash that resulted from the pandemic-driven collapse in global demand and the Saudi/Russia price war. Sub-$25/bbl crude prices in the U.S. have negatively impacted oil and gas producers’ spending plans for 2020. The high degree of integration between the U.S. and Canadian natural gas markets and pipeline systems means that the COVID-related U.S. gas market disruptions we discussed at the end of March in Flirtin’ With Disaster are most likely going to spill over the border to the Canadian gas market, with still very uncertain outcomes.

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