Historically, the Midwest market (Indiana, Illinois, Missouri, Michigan, Wisconsin, and Minnesota) has been supplied by two primary sources-- long haul pipelines carrying Canadian gas and long haul pipelines bringing gas from the Midcontinent and Gulf. This need to source gas from far away markets generally made the Chicago natural gas market trade at a premium to the Henry Hub (NYSEARCA:UNG) price as marginal supply into the region needed to flow North from Oklahoma, Texas, and Louisiana to meet demand in winter and fill storage in summer.
Beginning in 2008 with the start of Rockies Express Pipeline (NYSE:REX), consumers in the Midwest stopped needing to reach all the way back to traditional supply basins and began to buy gas from the Rockies and, with the reversal of REX, now from the Northeast, to meet marginal supply needs on the long haul pipeline. The unusually warm weather driven by El Nino this winter has made for lackluster storage withdrawals pushing Henry Hub natural gas prices from bad to worse. As a result of the warm weather, storage is at record levels for this time of year, even with a bullish withdrawal number this week (relative to expectations). Specifically looking at the Midwest, BTU Analytics decided to dive into the possible effects of a full storage scenario coming out of winter and impacts on Rockies Express gas flows, as well Midwest pipes that intersect REX such as ANR, Panhandle (PEPL), Texas Gas (NYSE:TGT), NGPL, and Northern Natural (NNG), with the goal of answering: could full Midwest storage combined with REX volumes displace all Northbound flows on traditional long-haul Midwest pipelines (ANR, NGPL, NNG, TGT, and PEPL) in Spring 2016 and drive basis in Chicago negative as gas looks to flow south from the interconnects with REX?
The map below shows the general idea behind what we are looking at: how much gas flows northbound, and how much is picked up through REX interconnects once the northbound pipes cross REX.
Highlighted in the chart below, Midwest storage levels are up nearly 140 Bcf compared to the same week in 2014, which translates to nearly 1.5 Bcf/d of gas that does not need to flow north through the balance of the withdrawal season (~140 days), as that gas is still in storage today. The question becomes whether or not this increase in storage from 2014 to 2015 could eventually hit a point where northbound Midwest pipeline flows could be entirely displaced by the gas in storage before the end of the withdrawal season or during the injection season this summer.
Historically flows on the long-haul pipelines to the Midwest from the Midcontinent and Gulf have moved more than 6 Bcf/d north. Current flows though have dropped to roughly 5 Bcf/d on those pipes , including REX receipts, as the warm winter has cut the need for supply from the Midcontinent and Gulf.
However the Midwest market sources a significant amount of the 5 Bcf/d of current flows from the Rockies and Northeast via REX. Supply on REX has increasingly been sourced from the Marcellus and Utica, as indicated by gas flows moving west across the Indiana-Ohio border on the pipeline. Today, ANR, PEPL, NGPL, TGT, and NNG source a combined 2 Bcf/d of the 5 Bcf/d from REX.
Running some quick calculations, we can come up with a few different scenarios for how the rest of the winter plays out. The first is that the mean reversion kicks in and a few significant cold snaps come through and withdrawal levels are equivalent to last year's rates. This would leave us at the 1.5 Bcf/d increase Y/Y in Midwest storage by the end of January. This could still cause some weakness for Chicago basis, but since it wouldn't be enough to displace all Midcontinent flows, it could be worse. The other is that withdrawal rates continue at the rate they are now compared to last year, which is a little over half of last years rates. In this situation, the storage levels would be 188 Bcf above last year's storage level at the end of January and could leave as much as 3 Bcf/d of gas back in the Gulf or Midcontinent through the end of the withdrawal season. As Midcontinent storage fills, basis in the Midwest could be under sustained pressure as shippers look to stuff gas in every nook and cranny and traditional long-haul flows could drop to historic lows. Ultimately, old man winter needs to appear soon, or gas prices may continue to see weakness this spring. To follow BTU Analytics' coverage of natural gas flows and impacts to Henry Hub, Northeast and Midwest basis, request a sample of the BTU Analytics Northeast Gas Quarterly.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.