Oversupply drags Northeast spot gas basis back to atypical pre-autumn lows

Denver — Recent and steep basis price dislocations at natural gas hubs across the US Northeast appear likely to continue until the arrival of colder weather as higher-than-usual production and dwindling midstream capacity leave Appalachian supply increasingly stranded.

In the past two weeks, cash basis at Dominion South has averaged a $1.19/MMBtu discount to the benchmark Henry Hub price. At the nearby Texas Eastern M2 receipts location, another key Appalachian supply hub, cash basis over the same period has averaged a $1.27/MMBtu discount to the benchmark.

Even at downstream locations in the Northeast market area — such as Boston's Algonquin city-gates and New York City's Transco Zone 6 hub — basis prices have seen severe discounts of more than $1/MMBtu in recent trading, data from S&P Global Platts shows.

In autumns past, Northeast supply and market-area hubs have experienced steep basis discounts from late September to early October. This year, though, the expected price discounts have come unusually early and appear reminiscent of the third quarter of 2017.

Starting in late June 2017, the discount at Dominion South widened to more than $1/MMBtu and remained there until demand began to increase in November. At the time, regional production was surging, just as Appalachian producers were awaiting critical midstream capacity expansions that came online in several phases as Rover Pipeline entered full service.

Prior to the startup of Rover's original 3.25 Bcf/d capacity, basis prices at Dominion dipped to a discount of more than $2/MMBtu to Henry Hub in September and October 2017.

Production

The return of deeply discounted gas prices in Appalachia this year has accompanied similar market conditions.

Since Aug. 1, gas production from the Marcellus and Utica shales has averaged 32.8 Bcf/d, matching its prior monthly record average in December 2019, S&P Global Platts Analytics data shows.

Recent Platts Analytics forecasts anticipate Appalachian production weakening marginally to around 32 Bcf/d in September and October as producers respond to shoulder-season price weakness. With the start of colder weather, though, production is expected to begin rising, hitting near record levels again by the end of the year.

Already in September, production is showing signs of weakening, falling to around 32.4 Bcf/d on Sept. 2. On Sept. 3, data showed output rebounding to 32.8 Bcf/d – a figure that could be revised lower in final-cycle data.

Midstream capacity

Another, no-less-important factor contributing to recent basis price discounts in Appalachia is the region's dwindling availability of extra midstream capacity, which has capped outflows to neighboring markets in the Midwest, the Southeast and the US Gulf Coast.

On Rover Pipeline and NEXUS Gas Transmission, both key westbound corridors to Midwest markets, volumes are already at or slightly above capacity. Remaining westbound capacity on Rockies Express Pipeline is also shrinking quickly and is currently estimated at around 80 MMcf/d.

To the Southeast and Gulf Coast markets, Tennessee Gas Pipeline has about 220 MMcf/d in remaining capacity through Station 110; further upstream at Station 204, though, only 55 MMcf/d remains.

Capacity and flow scenarios are similar on Texas Eastern Transmission, Transcontinental Gas Pipeline and Columbia Gulf Transmission – all key southbound corridors from Appalachia.