Analysis: Canada’s Dawn hub natural gas winter strip trades at rare discount to Chicago prices

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Denver —
’s Dawn hub winter strip continues to run at a rare discount to Chicago city-gates, but as looks to remain high in eastern Canada, the spread likely needs to widen more this winter, according to S&P Global Platts Analytics.

Over the past few winters, attention was focused on the influx of from the northeastern US on the Rover and Nexus , and how this would affect Dawn prices. This coming winter there are no new . But two lines from western Canada are contracted to ship higher volumes to Dawn. If the region experiences normal temperatures, Dawn is likely to be longer this winter than last and may need to below Chicago.

The biggest single winter-on-winter change to East Canada and Dawn will likely be weather related. Population-weighted temperatures in East Canada were about 2 degrees colder than the prior 10 years last winter, but a return to average temperatures is to cut demand to 5 Bcf/d this winter, a drop of 300 MMcf/d.

Another factor adding to Dawn’s length this winter is the likelihood of higher inflows from Western Canada through Great Lakes Gas Transmission and TC Energy’s Mainline. Both of these pipes are contracted to flow about 100 MMcf/d more into East Canada than last winter.

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The current Mainline outlook for the next decade, and the 2.5 Bcf/d that is contracted to flow from Empress to Eastern Canada this winter, is about 100 MMcf/d more than was contracted along this path in winter 2018-2019.

Likewise, there are contracts to move 950 MMcf/d into Dawn on Great Lakes, which is about 100 MMcf/d more than was contracted last winter.

But if AECO’s tightness this winter pulls gas away from Eastern Canada, and not Malin as Platts Analytics currently expects, it would alleviate much of Dawn’s length.

Platts Analytics assumes flows between the US Northeast and East Canada will be about flat to last winter at a 150 MMcf/d net outflow from Eastern Canada, if the region has average temperatures this winter.

Assuming storage withdrawals this winter in East Canada follow historical averages, the Dawn market looks to be 0.5 Bcf/d longer this winter than last, according to Platts Analytics. Demand would be down by 300 MMcf/d, while from Great Lakes and Mainline would collectively be up about 200 MMcf/d.

Between Dawn’s three suppliers — AECO, Chicago and Dominion South — Chicago indicate it would be the highest-cost molecule. This means that Vector , the primary conduit between Chicago and Dawn, will likely play the role of balancer for Dawn this winter, and flows would need to fall 0.5 Bcf/d from last winter, according to Platts Analytics.

This implies Vector will need to flow about 0.6 Bcf/d this winter, which is well below both the 1.1 Bcf/d that flowed last winter and the 1.2 Bcf/d five-year average. The need to turn Vector flows down to its lowest flow level of the decade this winter is likely why Dawn has traded in its typical premium to Chicago for a 2 cent/MMBtu discount in the futures market.

But low storage in West Canada’s AECO system this winter could cut supply to the east, and leave Dawn pricing itself back above Chicago and lead to higher flows on Vector.

— Brandon Evans, bevans@spglobal.com

— Richard Frey, richard.frey@spglobal.com

— Edited by Valarie Jackson, newsdesk@spglobal.com

Source: Platts

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