TETCO outage diverts flows to the Midwest, reducing AECO prices
The blackout lasts until the third quarter of 2021
Canadian production, exports remain strong
Strong Canadian production and exports face unexpected headwinds as the continued Texas Eastern Pipeline outage has diverted volumes from the Appalachian Mountains to the US Midwest, leading to lower AECO prices.
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The Texas Eastern blackout, which restricts flow between the northeast and southeastern United States, is pushing gas from the Marcellus to a key outlet for AECO, the U.S. Midwest, and weighing on prices, according to S&P Global Platts Analytics.
AECO’s cash base declined significantly over the past month, from a deficit of 27 cents / MMBtu at Henry Hub at the end of May to 55 cents / MMBtu behind the benchmark on June 30.
Supply from the northeast to the Midwest is on track for its second strongest month on record at 7.4 Bcf / d, up from 1.15 Bcf / d in April. The Nexus pipeline is responsible for about half of that increase and currently transports about 1.4 billion cubic feet per day in the Midwest, up about 200 million cubic feet per day from before the ‘stop.
While this is happening, the recent increase in production in Western Canada is weakening AECO to push additional gas to the Midwest to an average of 3.7 Bcf / d in June, up from 3.4 Bcf / d in June. April and May, adding to the region’s supply influx.
Texas Eastern’s most recent update says its outage will continue through Q3 2021, which means Chicago will face oversupply from the northeast for most of this summer. This will reduce AECO’s outright prices as it will send a marginal molecule to the Chicago market
However, with the Henry Hub rally, prices still appear to be producer friendly.
Canada is currently poised for strong production in the second half of 2021 for oil and gas after seasonal declines as traders took an aggressive tone in the most recent quarterly results. More than half a dozen have increased their capital forecasts, while nearly a dozen operators have raised their production forecasts due to high commodity prices.
Despite some increases in capital spending, almost all operators reported a reduction in their net debt in the first quarter. Based on strip prices and forecast prices from Platts Analytics, which see Brent reaching $ 70 / bbl this summer and Henry Hub close to $ 3 / MMBtu for the remainder of 2021, operators are expected to continue to deliver strong flows. of available cash. This will reduce debt levels while increasing the capital of the forest and / or shareholders. Canadian operators are increasing their capital spending on average (+ 13%) at a faster pace than American (+ 1%) and international (+ 8%) operators.
Declining production from Oklahoma also allowed Western Canada to send more gas to the upper Midwestern United States. The US Midwest is showing a change in supply this summer compared to last year, which has helped Western Canada send more supply to the region.
The biggest summer-to-summer change came from Oklahoma, where Chicago market entries are down 750 MMcf / d, according to Platts Analytics. This summer’s lower flows from Oklahoma to Chicago this summer of 2.1 Bcf / d is a continuation of a long trend. Summer 2020 has seen them averaging 2.9 Bcf / d since the start of summer, compared to 3.8 Bcf / d in summer 2019 at this point. This is due to lower production in Oklahoma, which has averaged 7.8 Bcf / d since summer 2019, 6.5 Bcf / d in 2020, and 6.1 Bcf / d through ‘at this point this summer.
Platts Analytics expects these losses to begin to stabilize, as inputs from Oklahoma are expected to average 1.8 Bcf / d in 2022 and 2023, with production losses becoming smaller around 5. 6 Bcf / d in 2023. This means the momentum that helps increase AECO’s market share around Chicago will be there for the foreseeable future once the additional influx from the northeast subsides.