Appalachian Basin gas forwards prices drift lower despite tightening supply

Natural gas forwards prices in Appalachia are looking increasingly undervalued recently as ongoing production weakness and low inventory levels keep the Northeast market balance under pressure.

At the region's benchmark upstream hub, Eastern Gas South, second-quarter basis markets have drifted steadily lower in 2022, despite the emerging pressure on Northeast supply. As of mid-February, forwards prices for April, May and June 2022 are trading nearly 80 cents behind the Henry Hub -- down from a discount closer to 70 cents just two months ago, S&P Global Platts M2MS forward data shows.

With lower shoulder-season demand levels in Appalachia and the Northeast likely priced in already, the continued downward pressure on second-quarter prices is notable, especially considering recent supply tightness.

Production and storage

After a steep drop in Appalachian gas production last month, regional output has continued to sputter.

In February, combined production from the Marcellus and Utica has fallen to an average 32.6 Bcf/d, down almost 2 Bcf/d, or about 5.5%, compared with its December 2021 average. Recent production freeze-offs have added to Appalachia's upstream supply tightness, cutting production earlier this month to about 31 Bcf/d, or its lowest since July 2021, S&P Global Platts Analytics data shows.

While new-year production declines in Appalachia are nothing new, both the depth and duration of this year's decline raises doubts over the potential for continued supply tightness heading into injection season and its possible impact on summer storage levels.

As of mid-February, Northeast gas inventories are now estimated at just over 430 Bcf and are currently trending near the bottom of their prior five-year range, according to data from Platts Analytics.

Even assuming smaller, closer-to-average drawdowns are recorded over the remaining weeks of winter, Northeast inventories would likely end the withdraw season at a deficit of 60 Bcf or more.

Production outlook

A healthy dose of market skepticism over the durability of Appalachia's production decline could be the primary factor behind continued weakness in the region's forward basis markets.

During recent fourth-quarter earnings calls, at least several of Appalachia's largest gas producers hinted at modest, low-digit production growth in 2022 -- among them CNX Resources and Seneca Resources.

At both companies, executives underscored their commitments to capital discipline but also noted the potential for future production growth achieved through efficiency gains rather than additional investments in drilling or completions activity.

While this winter's drop in Appalachian gas production could be quickly erased, recent history points to the possibility of a more prolonged contraction. During the winter 2020-21, the new year's drop in output persisted well into the second quarter, only matching the earlier winter-season highs about six month later in mid-June 2021, Platts Analytics data shows.