ANALYSIS: Elevated Dominion gas inventories risk late-summer selloff in Appalachia

A sharp selloff at Appalachia's benchmark hub, Dominion South, could be in store for late summer as inventory levels on Dominion Energy's gas storage system climb to an eight-year high for late May.

On May 28, Dominion reported another bearish injection – lifting stocks to 169 Bcf, a more-than 49 Bcf surplus to the five-year average – data compiled by S&P Global Platts Analytics showed. Following last week's 12 Bcf inventory build, Dominion has already reported six bearish weekly injections since the start of April, as compared to the corresponding five-year averages in each week.

On Appalachia's other major system, Columbia Gas Transmission Storage, inventories have been slower to fill this season, rising last week to 116 Bcf, or just a 3.7 Bcf surplus to the five-year average.

On Dominion, though, storage levels that are now estimated at roughly 55% of capacity could approach full by mid- to late-September, potentially fueling a selloff at Dominion South.

Last summer, inventories on Dominion climbed to their highest on record by late October at 296 Bcf, or about 97% capacity, just as demand was hitting shoulder season lows. With limited capacity to move gas to neighboring markets, cash prices at Dominion South plummeted to just 76 cents/MMBtu, S&P Global Platts data shows.

On Tuesday, forwards prices at the regional benchmark hub were assessed at $1.25/MMBtu for September and $1.30/MMBtu for October, suggesting traders may already be anticipating an oversupplied market by late summer. In 2019, cash prices at Dominion averaged $1.66/MMBtu and $1.44/MMBtu, respectively, in September and October.

PRODUCTION RISK

As Appalachian and Northeast gas markets rebound from recent pandemic-related demand destruction, rising production could add more supply length to the market by late summer, putting additional downward pressure on prices.

Following a recent move by the US' largest gas producer, EQT, to curtail production at certain of its Pennsylvania and Ohio wells, combined output from the Marcellus and Utica shales tumbled to an 11-month low on May 20 at just 30.8 Bcf/d, data from Platts Analytics shows.

In the days since, prices at Dominion South have climbed to recent highs in the $1.40/MMBtu range, up from earlier lows around $1/MMBtu. As EQT awaits what it anticipates should be higher prices by mid-summer, other producers in the region have increased production in response to higher prices and lower utilization rates on the region's production takeaway pipelines.

Over the past week, Appalachian output has averaged 31.4 Bcf/d, recently cresting at over 31.6 Bcf/d.

With EQT's recent well curtailments expected to end by July, the return of some 1.4 Bcf/d of additional production to the market could lift regional output to annual highs near 32.8 Bcf/d.

After recently reaffirming its previous production guidance of 1.45-1.50 Tcfe for 2020, it's possible that the EQT could bring significantly more gas into production as it looks to compensate for recently lost volumes.