Appalachia's forward gas market shrugs off production drop as cash, balmo prices rise

Forward gas markets in the Appalachian Basin have remained largely indifferent to this month's steep drop in gas production there, even as tighter supply boosts cash and balance-of-month contract prices.

At the region's benchmark upstream hub, Eastern Gas South, calendar-month basis prices for Q1 are actually lower this month compared to last, despite continued production weakness in Appalachia and rising seasonal demand across the US Northeast.

Month to date, Eastern Gas South's February 2022 forward contract has dipped about 4 cents from its prior-month average to 61 cents discount to the Henry Hub. The March contract is down about 2.5 cents this month to average 56 cents behind the benchmark, S&P Global Platts' M2MS forwards data shows.

Lower forward basis at Eastern Gas has persisted this month even as the hub's cash and balance-of-month prices rise. In January, cash basis is up nearly 30 cents to 51 cents discount to Henry Hub. After rolling to January, the balmo contract at Eastern Gas has also strengthened, settling most recently at just 35 cents discount to the benchmark – up from a more-than-75 cents discount late last month.

The more bullish near-term price trend reflects tighter supply-demand fundamentals this month in both Appalachia and the Northeast gas markets more broadly.

Production, demand

In January, combined production from the Marcellus and Utica has fallen to an average 33.3 Bcf/d – down about 1.2 Bcf/d, or almost 3.5%, compared with the December average. In late January, the steady decline in gas production has continued with output recently dipping to its lowest since July at an estimated 32.2 Bcf/d on Jan. 22, S&P Global Platts Analytics data shows.

While declines in gas production in the new year are not uncommon in Appalachia or other North American shale basins, the 2022 downturn comes just regional gas demand hits seasonal highs. On Jan. 21, total Northeast demand topped 37.5 Bcf/d to reach its highest since January 2019. Over the next seven days, demand forecast to remain elevated at an estimated 33.2 Bcf/d.

In its eight- to 14-day outlook, the National Weather Service has forecast milder temperatures for the Northeast which are also expected to persist through February.

While warmer weather could help to ease the Northeast market balance, basis prices at Eastern Gas South and other nearby hubs are likely to remain elevated into next month and potentially into March, absent a rebound in gas production.

A quick rebound in gas production across Appalachia isn't entirely out of the question. Its its latest survey published Jan. 19, Enverus reported an estimated 40 drilling rigs in operation across the Marcellus shale – the most since February 2020. Recent data from the US Energy Information Administration also show upstream activity in Appalachia at or near pandemic-era highs as new-well drilling and well completions accelerate.