Gas basis may be threatened as the amount of natural gas in storage could set new records in the U.S. Midwest and East regions of the U.S. this fall.
Storage in the East is currently 80% and the Midwest is 78% full, with still two months left until peak storage, when gas injections turn to gas withdrawals as the northern hemisphere enters winter. These are high percentages for this time of year and leave little room for error. If regional storage caverns cannot take any more gas or reduce their daily injections, nearby gas basis prices would suffer.
The graphic below shows storage locations for both the U.S. Midwest and the Northeast as well as the location of Dawn, Ontario, Canada, where much of Canada’s eastern-region gas storage is located.
Dawn is important for not just eastern Canada, but also for U.S. Midwest prices and storage levels. If Dawn has too much gas, there is more potential supply into the Michcon/Chicago area. As the chart on the right shows, Eastern Canadian storage is at all-time highs for this time of year, per Bloomberg estimates.
Below are gas storage seasonality charts for both the Midwest and East regions. Both regions are perched near the upper limit of what is normal during this time of year.
Both regions are on pace to approach new all-time highs come mid-November. This means both regions could be entering uncharted territory where stored gas exceeds previously demonstrated peak capacity.
In the East region, the previous highest level of storage recorded was 983 Bcf, compared to a nameplate storage capacity of 1,065 Bcf. If we extrapolate using the 2018 and 2019 rates for the remainder of the 2020 injection season, the East levels would end between 965 and 1,007 Bcf.
In the Midwest, the highest reported level of storage was 1,181 Bcf, with nameplate capacity at around 1,222 Bcf, according to the EIA. Using 2018 and 2019 rates for 2020, the Midwest would end between 1,213 and 1,203 Bcf. This would be very close to reported nameplate capacity.
AEGIS remains constructive on the Henry Hub market for this winter, even considering recent strength in prices. But some basis locations in the Midwest and East may feel some pressure as storage tries to tiptoe past injection season.
Gas production may have declined recently for the whole U.S., but not so much in Appalachia, whose gas is sent to the U.S. Midwest and East regions. A turn to mild weather this fall could push the storage limits near what is operationally possible in two key regions.