Rallying winter gas prices in Appalachia defy Northeast inventory gains

Winter basis prices at Eastern Gas South are on the rise this month despite growing inventory levels in the US Northeast, highlighting the increasingly bullish outlook for Appalachian supply this season.

Since the start of July, January 2022 forwards at Eastern Gas have climbed nearly 25 cents, or over 30%, to a now 52 cent discount to the Henry Hub, S&P Global Platts' most recently published M2MS data shows.

Basis prices at Eastern Gas have climbed in tandem with Northeast gas storage levels.

Over the past eight weeks, an accelerated pace to injections has lifted Northeast inventory to an estimated 977 Bcf, S&P Global Platts Analytics data shows. The larger injections have narrowed the region's deficit to the five-year average storage level to less than 20 Bcf – down from a more than 60 Bcf deficit in late August.

At their current pace, injections could lift regional inventories to over 1 Tcf by later this month, allowing Northeast storage to hit typical pre-winter levels before a start to the withdrawal season.

As storage levels continue rising, the unabated rally in winter basis prices at Eastern Gas likely reflects mounting concern over Appalachia's recent production weakness – and season-on-season demand growth from neighboring end-user markets in the Midwest and the Southeast.

Production

Month to date, combined output from the Marcellus and Utica shales has averaged about 33.4 Bcf/d.

Last winter, Appalachian production ramped up sharply in October, hitting record highs at over 34 Bcf/d late in the fourth quarter. During the peak-demand months of December and January, output averaged nearly 33.7 Bcf/d, according to Platts Analytics data.

While several producers have committed to ramping up production ahead of this winter, it remains unclear whether and to what extent those plans will materialize.

In the week ended October 13, Enverus reported a three-rig addition in the Marcellus, lifting Appalachia's total rig count to 46 – still just one to two rigs above the year-to-date average.

Outflows

While flagging production has tightened Appalachian supply over the past year, demand for the basin's gas from neighboring markets has only accelerated.

From June 1 to date, net outbound gas transmissions from the Northeast have averaged nearly 14.1 Bcf/d. In the year-ago period, outflows averaged just 13 Bcf/d. Stronger demand has continued into the shoulder season with outbound flows this month remaining about 100 MMcf/d higher, compared with October 2020.

Outlook

While its unclear whether current production and neighboring market demand levels will hold, historical price data suggests that there could further upside potential for basis prices at Eastern Gas South.

Last January, cash basis at Eastern Gas averaged just a 34 cent discount to the benchmark Henry Hub. In January 2020, basis trended about 37 cents behind the benchmark, S&P Global Platts data shows.

While the growth in Appalachia's midstream capacity has stalled in recent years, so too has production. Year to date, output from the Marcellus and Utica has averaged about 33.3 Bcf/d – up just 1.2 Bcf/d compared with 2020.