NYMEX prompt natural gas hits two-month high as force majeure cuts Appalachian production

NYMEX Henry Hub prompt-month prices surged to a two-month high in July 7 trading after a force majeure on Columbia Gas' Mountaineer XPress Pipeline cut Appalachian gas production by over 2.2 Bcf/d, amid no announced timeline for a return to service on the impacted segment.

After trading into the low $1.90s, the August contract settled July 7 at $1.88/MMBtu – up more than 20 cents since the start of the month to its highest closing price since early May. In the cash market, Henry Hub gas rose about 4 cents on the day to $1.74/MMBtu, preliminary settlement data from S&P Global Platts showed.

In Appalachia, gas production dropped on July 7 by over 2.2 Bcf on the day to an estimated 29.8 Bcf, its lowest in 14 months, amid concentrated declines in the West Virginia wet and South Pennsylvania dry windows, data compiled by S&P Global Platts Analytics showed.

While upstream receipts are likely to be revised higher as rerouted production becomes visible, a return to prior 30-day output levels in Appalachia, around 31.6 Bcf/d, could be limited by existing flow restrictions on other regional pipes, including Texas Eastern Transmission, and by elevated storage levels.

Force Majeure

In a critical notice updated July 7, Columbia Gas said that unplanned maintenance on a segment of its Mountaineer XPress Pipeline near Leach, Kentucky would a require a temporary pressure reduction, dropping capacity on the line to 100 MMcf/d, down from its nameplate 2 Bcf/d.

According to the updated posting, the pressure reduction will remain in effect until further notice.

Flows along the affected segment of Mountaineer XPress dropped to 100 MMcf/d July 7, down from a prior 30-day average at 1.9 Bcf/d. In West Virginia, evening cycle production receipts dropped roughly 1.6 Bcf on the day, while receipts in southern Pennsylvania were down by over 400 MMcf/d.

Appalachian market

At Appalachia's benchmark Dominion South hub, stranded production overwhelmed local demand, driving cash prices down about 16 cents on the day to a preliminary settlement at $1.33/MMBtu.

According to Platts Analytics, Tennessee Gas Pipeline has the most spare-capacity among alternate interstate pipes exiting the Appalachian Basin, with roughly 500 MMcf/d available.

With capacity on Texas Eastern Transmission limited by its own ongoing pressure reduction near the Owingsville compressor station in Kentucky, the pipeline is current flowing nearly full around 1.4 Bcf/d.

Regional gas storage could offer some short-term support for upstream prices and production, but volumes are already trending near five-year maximum levels at nearly 760 Bcf. Current forecasts show inventories approaching capacity at 1.1 Tcf by end-September with diminishing injection demand potentially putting downward pressure on Appalachia's cash markets by early September, Platts Analytics data shows.

Outlook

Downward pressure on Appalachian production and a more bullish outlook for LNG export demand this autumn appear to be quickly resetting the outlook for US gas prices.

On July 7, futures prices for August, September and October were all up another 5 cents to $1.88, $1.94 and $2.03/MMBtu, respectively, preliminary data from CME group showed.

Over the previous five trading days, balance-third-quarter forwards prices at the Henry Hub had already gained nearly 18%, settling July 6 at an average $1.82 – up from an average price at $1.55/MMBtu on June 26, S&P Global Platts' most recently assessed M2MS forwards data shows.