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Trouble In The West

In a recent Energy Market Commentary piece, BTU covered California natural gas demand destruction from increasing renewable energy growth. Strong showings from both Hydro and Solar power generation have driven natural gas demand to a 5-year low in CA, causing effects that will be felt through all the gas markets in the West. Associated gas growth from the Permian is quickly reaching capacity constraints, and stagnant to shrinking CA demand places additional pressures on an already weakening basis at Waha Hub. But the Permian isn’t the only play to feel the lack of demand and pricing pressures, Rockies gas is also facing demand and market problems moving forward.

While overall Rockies natural gas production has been in decline, there is still significant growth from the DJ Basin due to operators such as Anadarko and Noble Energy. But much like the Permian, Rockies takeaway options are limited. In a previous piece, BTU Analytics covered potential market routes for Rockies gas, with REX providing outlets to Midwest and Southeast markets. Natural gas pipeline flow data highlight the shift in Rockies flows from serving West demand in Winter to striving for Eastern outlets with a high utilization of REX pipeline capacity.

Over the last 30 days, REX has been flowing full from west to east into the Zone 3 market. Demand seasonality, plus increasing renewable generation from California, has amplified this effect, but REX is currently moving nearly 1.6 Bcf/d West into Missouri/Illinois. With another 2.4 Bcf/d coming in from Appalachia, the question is, what happens to this gas once it hits Zone 3?

Most of this gas is delivered into Illinois, Indiana, and Ohio aimed at serving the Midwest markets. The chart below shows pipeline interconnect deliveries into Illinois from REX. Currently ~1 Bcf/d is going to the NGPL pipeline with the remainder being delivered to Trunkline and Midwestern. Most of this gas flows north into Chicago and other Midwest markets, which have historically traded at premium prices.  However, the volume growth of deliveries from the last month has set new highs, worsening the potential oversupply problem in the Midwest and creating concerns for Midwest basis points moving forward.

Deliveries to Indiana tell a similar story, with most of the gas molecules going to the ANR pipeline and total flows averaging near 1.4 Bcf/d over the last month. Why does this matter? With so much supply landing in Zone 2 and Zone 3 from the Rockies and Appalachia, the Chicago and Dawn markets won’t be able to provide enough incremental demand to keep up. Therefore some of these volumes will need to find their way to the Gulf Coast, pushing back on the NGPL and ANR pipelines.

Without a strong gas demand market in the West, a growing portion of gas volumes will be required to move East from all of the major plays. Unfortunately, infrastructure constraints will make this difficult. Pricing points across the West will see increased pressure in the near term as the Waha basis remains wide until new pipeline capacity bridging Permian and Oklahoma production to the Gulf Coast comes online.  As Marcellus/Utica, Canadian, and Rockies gas all fight for market share in the Midwest, who will be able to remain competitive and come out on top?

For more information and detailed analysis surrounding shifting gas flows and market trends, request a sample of the Upstream Outlook and the Henry Hub Outlook.

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