ANALYSIS: Rising demand, prices to pull Appalachian Basin gas production higher by winter

New York — Flagging Appalachian Basin gas production is poised for a rebound in the weeks ahead as regional operators respond to an uptick in demand and prices, likely to come with the arrival of cooler weather.

Month to date, combined output from the Marcellus and Utica shales has averaged 31.1 Bcf/d, down about 700 MMcf/d from the month prior and over 2 Bcf/d, or 6%, below its monthly record high in November 2019. On Oct. 12, production was estimated at just 30.4 Bcf/d, data compiled by S&P Global Platts Analytics showed.

Recent declines appear to have come in response to weaker market conditions.

Cabot Oil & Gas on Oct. 7 said that it began strategically curtailing some 370 MMcf/d of its Appalachian production starting in mid-September. According to CEO Dan Dinges, the decision came in response to lower 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.

At least one other Appalachian producer, CNX Resources, has acknowledged in a recent investor presentation that it too has voluntarily curtailed production this autumn.

According to Platts Analytics, as much as 1 Bcf/d in Appalachian production could be sidelined currently. With the arrival of colder temperatures, stronger demand, and higher prices by November, much of that curtailed output could be quickly restored.

Demand

In October, gas demand across the US Northeast region has averaged 14.5 Bcf/d, or it lowest since May.

Milder temperatures are largely to blame, keeping both power burn and residential-commercial heating demand in check. Additionally, though, seasonal maintenance at Dominion Energy's Cove Point LNG export facility has also depressed regional demand levels this month.

On Oct. 12, feedgas flows to the Maryland terminal jumped to an estimated 453 MMcf/d, up from zero in the 21 days prior, as the facility began ramping up production, Platts Analytics data showed.

As Cove Point throttles output back toward pre-maintenance levels around 700 MMcf/d, and temperatures begin cooling across the Northeast, producers could respond by dialing up production.

Over the past three autumn seasons, Northeast heating demand has climbed sharply starting in late October and averaged over 11 Bcf/d in November. Month to date, regional residential-commercial demand has underperformed, averaging just over 4 Bcf/d, Platts Analytics data shows.

In 2017, 2018 and 2019, Appalachian producers increased output from October to November, owing – at least in part – to the higher winter demand levels.

Prices

On Oct. 12, cash prices at Appalachia's key benchmark supply locations were up sharply with a 1.3 Bcf/d, or nearly 10%, jump in regional demand prompted by the arrival of cooler temperatures and the startup of feedgas deliveries to Cove Point.

At Dominion South, prices were up nearly 50 cents to $1.01/MMBtu; at Columbia Gas Appalachia the spot market rallied almost $1 to end trading around $1.54/MMBtu, preliminary settlement data from S&P Global Platts showed.

The Oct. 12 cash-market gains are likely to further strengthen an already bullish outlook for winter.

On Oct. 9, calendar-month forwards for winter's peak-demand month of January settled at $2.91/MMBtu – less than 10 cents below an annual high in late September. At the nearby Columbia Gas Appalachia location, prices most recently settled at $3.05/MMBtu, down about 11 cents from the same late-September market high, S&P Global Platts' M2MS data shows.