Appalachia's autumn gas forwards hit record low amid substantial supply growth

New York — Autumn forwards prices at Appalachia's benchmark Dominion South hub are at fresh lows in late June as anticipated production growth, rising gas storage levels and limited midstream capacity loom large over the shoulder-season market.

On June 25, prices for September and October tumbled to just $1.07/MMBtu and $1.13/MMBtu, respectively – the two calendar months' lowest settlements on record, S&P Global Platts most recently published M2MS forwards data shows.

In early May, autumn forwards at Dominion South traded up to annual highs in the low- to mid-$1.70s/MMBtu amid market optimism for a steep and sustained decline in US gas production and a tightening in domestic supply by late third-quarter.

In Appalachia, that bullishness was further reinforced when the region's largest gas producer, EQT, said it would curtail some 1.4 Bcf/d in dry production from its acreages in Pennsylvania and Ohio.

In recent weeks, though, rebounding production in associated gas plays such as the Permian, the Bakken and elsewhere has reset the market outlook for autumn and early winter gas supply. Further dampening the supply outlook for Appalachia producers in particular, EQT recently reiterated its unchanged full-year production guidance in a decision that could bring output from its curtailed wells back online as early as July 1.

Storage

Through late June, modeled Northeast gas storage levels are trending around 735 Bcf and are now less than 3 Bcf below 2016's record inventory trajectory. According to a recent forecast from S&P Global Platts Analytics, the region's available capacity is currently on course to fill by early to mid-September – nearly two months ahead of the traditional end to injection season.

In 2016, Appalachia's gas storage began approaching its total 1 Tcf capacity by early October, prompting a precipitous selloff at Dominion South. During the first week of October 2016, the benchmark supply hub traded down to a record low at 21.5 cents/MMBtu, S&P Global Platts data shows.

This autumn, a potentially earlier narrowing in regional storage capacity could see Dominion South's cash market come under significant pressure by mid-September, with sub-$1/MMBtu prices possibly enduring through late October when colder weather begins prompting storage drawdowns.

Midstream capacity

Adding to the increasingly bearish outlook for Appalachia this fall, the region currently has no major production takeaway projects under construction, or even planned, that could help to ease the region's growing surplus.

Following a May 5 explosion that rocked Texas Eastern Transmission in Kentucky, a partial restoration of service on the pipeline has also limited Northeast producers' market access. With no end date to the restriction yet announced, it's likely that reduced flow capacity from Appalachia to the US Southeast and Gulf Coast markets will remain through the critical autumn months.

Outlook

Month to date, Appalachian gas production is averaging roughly 31.5 Bcf/d. According to a recent market forecast, regional output should rise to about 31.7 Bcf/d over the balance of summer. Assuming EQT restores all of its previously curtailed output, production could push even higher, potentially revisiting prior record highs at over 33 Bcf/d.

A recent and contrarian market outlook from Platts Analytics also considers the possibility that production could be forced to contract in September and October, falling to the low-30 Bcf/d area under pressure from record low prices, limited storage and midstream capacity, and weak shoulder-season demand.

Despite the medium-term bearishness, forwards markets are still pricing in an uplift from winter demand. On June 25, the January 2021 calendar-month contract settled at $2.40/MMBtu – roughly at par to its year-to-date average price of $2.39/MMBtu, Platts M2MS data shows.