ANALYSIS: Marcellus, Utica gas producers cut output as autumn prices, demand tumble

New York — Appalachian Basin gas production is down sharply this month as many operators dial back output in response to record price volatility, weaker shoulder-season demand and elevated storage levels.

In October, aggregate production from the Marcellus and Utica shales has averaged just 31.4 Bcf/d – about 500 MMcf/d, or 1.6%, below the prior-month average, S&P Global Platts Analytics data shows.

On Oct. 8, cash prices at the region's key upstream hubs tumbled to historic lows, coming under pressure from a selloff at the US benchmark Henry Hub.

At Columbia Gas Appalachia, spot prices were down by nearly 55% from the Oct. 7 settlement to a record-low 60.5 cents/MMBtu. At Dominion South, cash prices were off by over 40% to around 66 cents, maintaining some distance from an Oct. 1 multiyear low settlement at 57 cents/MMBtu, preliminary data from S&P Global Platts showed.

Recurring price volatility during the autumn months has prompted at least some producers to throttle back output this season.

Cabot Oil & Gas on Oct. 7 said that it began strategically curtailing some 370 MMcf/d of its Appalachian production starting in mid-September. CEO Dan Dinges said that the decision came in response to lower regional gas prices. Cabot joined the region's largest producer, EQT, which said last month that it began curtailing a net 425 MMcf/d in gas production on Sept. 1.

Regional price weakness in September and October has become a cyclical pattern in recent years, caused by lower seasonal demand, LNG terminal maintenance and high storage levels.

Demand, storage

Since the official start of autumn, gas demand in the US Northeast has fallen to an average 14.9 Bcf/d – down nearly 1 Bcf/d compared with the final month of summer, Platts Analytics data shows.

A significant portion of that decline has been temperature-driven with mild weather keeping both gas-fired power burn and residential-commercial demand lower compared to the peak summer and winter periods.

The startup of regular seasonal maintenance at Dominion Energy's Cove Point LNG terminal has also weighed on regional demand recently. Since September 22 – also the official start of autumn – feedgas demand at the Maryland terminal has remained at zero, down from an average 680 MMcf/d in the 30 days prior.

As Northeast gas storage levels approach capacity, waning injection demand is another factor that has weighed on Northeast market balances and prices. On Oct. 8, inventories were estimated at 1.02 Tcf – only about 40 Bcf below the region's demonstrated maximum at 1.06 Tcf, recorded in November 2009.

Forwards

Despite this season's historic slide in cash prices, forwards markets continue to anticipate significant strengthening ahead of, and into the upcoming heating season.

At Dominion South, balance-of-the-month prices settled Oct. 7 at $1.18/MMBtu. At Columbia Gas Appalachia, the balmo contract ended trading at $1.28/MMBtu.

At both locations, forwards prices for January – typically the region's peak month for winter demand – prices were most recently assessed at or near $3/MMBtu, S&P Global Platts M2MS data shows.