Appalachia gas production drop lifts regional cash basis as forwards turn bearish

A precipitous drop in Appalachian Basin gas production this month has boosted cash basis at the region's upstream hubs recently. With weaker forward basis currently priced in for February, though, traders appear to be anticipating renewed supply pressure by as early as February.

After reaching a record-high 34.8 Bcf/d in late December, Appalachian production has since tumbled, falling to a new-year low at an estimated 33.3 Bcf/d on Jan. 14, S&P Global Platts Analytics data shows.

Declines in gas production at the turn of the calendar year are not uncommon in Appalachia or other North American shale basins, according to Platts Analytics. The timeline for new-year rebounds in output, though, has varied significantly in the past depending on market conditions or other factors.

For now at least, Appalachia's producers are collectively reaping the benefit from this month's drop in supply with higher basis prices at upstream hubs. Over the past week, cash prices at the region's benchmark location, Eastern Gas South, have strengthened to an average 44 cents discount to Henry Hub – up sharply from an average 78 cents discount in December, S&P Global Platts data shows.

While it remains uncertain how quickly Marcellus and Utica production could rebound this year, forwards traders appear to be bracing for more supply pressure on the market by as early as February.

2022 Forwards

At market close Jan. 13, the balance-of-month forward contract at Eastern Gas South settled at an average 54 cents discount to the Henry Hub while the February 2022 contract ending trading at an even steeper discount of 65 cents, S&P Global Platts most recently published M2MS forwards data shows.

Compared with January's cash basis average at minus 44 cents month-to-date, weaker forward basis for the balmo and February 2022 contracts likely reflects trader's anticipation of a coming gain in gas production.

Over the past two winter seasons, January production declines in Appalachia were followed by sustained lower output levels over a period of six months or more, Platts Analytics data shows.

This year, though, the market could be anticipating a quicker rebound following the recent startup of Transcontinental Gas Pipe Line's Leidy South project – an interstate pipeline expansion that entered full service in December offering producers an incremental 580 MMcf/d in transmission capacity out of the Appalachia Basin.

Record-production levels last month, which came after the Leidy South project entered service, also followed the announcement of new production guidance from at least two Appalachian producers – National Fuel Gas Company and Coterra Energy – both of whom said on third-quarter earnings calls that they intended to grow output this winter to fill newly leased capacities on Leidy South.

Combined, the late-2021 developments are a bullish indicator for Appalachian production growth this year. Over the past month, the shifting outlook for Marcellus and Utica production could be a contributing factor for recent weakening in Eastern Gas' 2022 forward curve. At market settlement Jan. 13, nearly all the hubs' 2022 calendar-month contracts were priced below prior valuations recorded just one-month ago. On average, the 2022 forward curve is now priced at 83 cents below Henry Hub, down from an 80 cents discount to the benchmark in mid-December, Platts data shows.