Pacific inventories of underground natural gas remain elevated relative to historical norms – but far less so than any other region.
Scorching summer heat in the West and periods of interrupted flows from the Permian Basin have offset robust imports of cheap Canadian natural gas. The result: Pacific stocks were 9% above the five-year average at the end of July, according to the U.S. Energy Information Administration (EIA).
The Pacific surplus was more than cut in half from the end of May. It dwindled dramatically from the 40% level in March. The national surfeit also hovered around 40% in March following a mild winter. But it finished July at 16%. All other regions posted double-digit surpluses to close out last month, according to EIA.
Paragon Global Markets LLC’s Steve Blair, managing director of institutional energy sales, told NGI that “any significant reduction in the storage overhang” is key for prices. Indeed, using the cash market as a barometer, California prices are the highest in the country.
PG&E Citygate in Northern California averaged $3.635/MMBtu on Thursday to kick off August trading, while SoCal Citygate clocked in at $2.925. Both far exceeded NGI’s National Avg. of $1.805.
Lofty temperatures have baked California, in particular, with highs in the 90s on up proving commonplace through the summer to date. This got air conditioners cranking and galvanized natural gas consumption.
In addition, California buyers are competing with Phoenix, Las Vegas and other markets in the sizzling Southwest for gas sent via pipelines from the Permian. While there is an abundance of associated gas produced in the Permian, multiple planned and unplanned maintenance events throughout the spring and summer restricted flows leaving the prolific basin. This backed up supplies in New Mexico and West Texas, battering prices at Permian benchmark Waha, but adding a bullish undercurrent for hubs in the West.
Waha on Thursday averaged negative 8.0 cents. West Texas prices overall were by far the weakest in the Lower 48.
This has helped to offset the impacts of low prices in Western Canada, a region that is flush with supply amid record levels of production in anticipation of a new export facility. LNG Canada is slated to begin operations later this year and is expected to draw down excess supplies to feed mounting global demand.
In the meantime, though, production is outstripping demand in Canada. Prices at NOVA/AECO C on Thursday averaged C73.5 cents/GJ. The cheap prices have attracted the attention of Pacific buyers, helping to boost overall levels of Canadian imports into the Lower 48.
Wood Mackenzie estimates pegged Canadian imports at around 7.0 Bcf/d over the past week, more than 1 Bcf/d above the year earlier level.
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All of that noted, RBN Energy LLC analyst Martin King expects initial liquefied natural gas exports from LNG Canada by the fourth quarter as part of the facility’s commissioning process, followed by a ramp up next year. As such, excess Canadian supply is hardly indefinite.
At the same time, with takeaway capacity from the Permian limited heading into the coming winter, California and other western markets are walking a fine line between too much gas in storage and not enough.
Permian natural gas takeaway capacity increased by about 1 Bcf/d over the past year after expansion projects, and more meaningful capacity awaits with the completion of the 2.5 Bcf/d Matterhorn Express Pipeline. It is due online later this year. Yet five LNG projects are under construction along the Gulf Coast to increase U.S. export capacity from 14 Bcf/d to nearly 25 Bcf/d by the end of the decade. Those facilities will add hefty competition for Permian supply.
Historically, Pacific stockpiles proved prone to wild swings, given the massive population of the West Coast as well as the potential for extreme heat and robust demand there during the summer months. For example, at the start of August last year, Pacific inventories were 13.5% below historical norms.
While stocks are above average to start the final full month of summer this year, National Weather Service forecasts call for hotter-than-normal temperatures in California for August overall. As such, where heat endures, “storage surpluses are likely to fall rapidly throughout August,” said EBW Analytics Group’s Eli Rubin, senior analyst.
