The Daley Note: April 25, 2023
An unusual weather pattern this winter has created division in the natural gas market that will influence regional prices and spreads in 2023, according to East Daley Analytics’ US Macro Supply and Demand Forecast.
On a national level, the US saw winter temperatures 6% above normal through the end of March, according to gas-weighted heating degree days (GW-HDD) measured by the National Weather Service (NWS). The mild winter lowered gas demand for heating and, combined with strong production growth, helped create a looser market balance.
Heading into spring, US underground storage inventory is ~330 Bcf above the seasonal 5-year average, according to the latest weekly Energy Information Administration (EIA) storage data, a key reason Henry Hub prices have fallen to the $2/MMBtu level.
While net bearish, the national weather data fails to capture the nuance in the winter gas story. At a regional level, the winter was unusually balmy across the eastern two-thirds of the US, including record warmth in parts of the mid-Atlantic and Southeast, while the West Coast and Rocky Mountains experienced a harsh winter.
According to NWS census data, New England (-13%), the Mid-Atlantic (-14%) and the Southeast (-14%) regions saw total GW-HDDS significantly below normal through the end of March. By contrast, cumulative GWHDDs were 14% above normal in the Pacific region and 6% above normal in the Rocky Mountains.
The opposing demand trends have created two distinct markets split along the Continental Divide. Working gas storage inventory in the West (Pacific and Rockies regions) is 38% below the 5-year average as of April 14, according to EIA storage data, while combined working gas in the producing and eastern consuming regions (Midwest and Northeast) is 32% above 5-year norms (see figure). 
The situation is particularly dire for storage in the downstream Pacific region. The West Coast was pummeled by a series of storms this winter, including a February blizzard in Southern California. West Coast storage inventory fell to 72 Bcf in mid-March, according to EIA’s weekly survey, the lowest ever in at least 13 years based on weekly regional estimates dating to 2010. The long winter sent gas prices spiking to over $40/MMBtu at hubs in California and the Pacific Northwest.
East Daley covers the West Coast in our US Macro Supply and Demand Forecast, including pipeline flows to the West in the Rockies and Permian Supply and Demand Forecasts. Working gas storage in the Pacific region storage totaled 83 Bcf in EIA’s latest survey for the April 14 week, 53% lower than the 5-year average for this time of year (see figure). 
While gas has fallen under $2/MMBtu in many basins, the West Coast continues to trade higher at the Southern California border and at the Sumas and Malin points in the Pacific Northwest. These points frequently commanded a $1-1.60 premium over the Henry Hub in recent trading. Prices in the Rockies also have been trading at a premium to the Henry Hub, providing a relative boost for producers and midstream companies active in the region.
The divergence in storage should continue to support wider regional spreads. Premium prices have been drawing gas from as far away as the Northeast via the Rockies Express Pipeline, and western prices must stay elevated to attract volumes. Shippers on pipelines that directly feed the West Coast, including the Permian, Rockies and Western Canada, could see gains in an otherwise tough macro gas environment. Please reach out to East Daley Consulting for more information. – Andrew Ware & Ryan Smith.
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