ANALYSIS: As Henry Hub rallies, growing market dislocation leaves Appalachian Basin behind

New York — Cooler late-autumn weather and rising gas demand are lifting Henry Hub gas to annual highs, but basis prices in Appalachia continue to lag as the region becomes increasingly disconnected from Gulf Coast markets.

On Oct. 26, Henry Hub cash surged to a 19-month high at $3.08/MMBtu, propelled by a weekend jump in residential-commercial heating and more modest gains in industrial and LNG feedgas demand.

As winter-like temperatures in the Midwest and the Rockies pushed benchmark gas prices higher, cash markets in Appalachia also climbed but remained at a significant discount to the Gulf Coast.

At Columbia Gas Appalachia, prices were up $1.11 to $2.27/MMBtu in morning trading. At Dominion South, the market gained nearly 50 cents to $1.64/MMBtu. At both locations, though, basis prices remained comparatively week at minus 81 cents and minus $1.44/MMBtu, respectively, preliminary settlement data from S&P Global Platts showed.

While steep autumn-season discounts at Columbia Gas and Dominion South are nothing new, multiyear basis lows recorded this October reflect the increasingly insular character of the Appalachian market. In fact, at Dominion South, the last time basis prices were weaker was in October 2017 – just prior to the startup of full service on Rover Pipeline and several other critical expansion projects.

Fundamentals

According to S&P Global Platts Analytics, nearly every interstate production-takeaway pipeline from Appalachia has now reached or is nearing its capacity limit. As egress capacity from the basin dwindles, regional market dynamics including production, demand and storage are becoming key drivers for price outcomes at hubs such as Columbia Gas and Dominion South.

Over the past seven days, Appalachian production has staged a puzzling rise, climbing about 600 MMcf/d from its prior-month average to about 32.3 Bcf/d, Platts Analytics data shows.

Recent production growth has added to supply pressures coming from the storage market. Over the past week, the Northeast region's two largest storage operators reported steady injections, keeping inventories above five-year average levels.

At Columbia Gas, storage was estimated Oct. 23 at 248 Bcf, just 13 Bcf below the operator's observed maximum level in October 2009. At Dominion Energy, weekly inventories were most recently estimated at 287 Bcf – only 9 Bcf below their October 2019 record high, Platts Analytics data shows.

With a recent cold front in the Midwest, the Rockies and the Northern Plains leaving the Eastern Seaboard largely excluded, the long-awaited seasonal surge in heating demand across the region has yet to materialize this year. On Oct. 26, residential-commercial gas demand was estimated at 5.9 Bcf/d, well below highs seen earlier this month.

Outlook

On Oct. 23, forward basis prices at Dominion South settled at an average 45 cents/MMBtu discount to Henry Hub for this winter's peak-demand months of December, January and February, S&P Global Platts' most recently published M2MS forwards data shows.

While higher, more typical winter-season basis discounts at hubs such as Dominion South and Columbia Gas are now just around the corner, this October's market environment offers a glimpse of what's potentially to come in future shoulder seasons.

Following a cancellation of the 1.5 Bcf/d Atlantic Coast Pipeline earlier this year, the 2 Bcf/d Mountain Valley Pipeline, now over 90% complete, could become the last major production-takeaway project to enter service.

On Oct. 16, just days after the Federal Energy Regulatory Commission voted to partially lift a stop-work order on the pipeline, the 4th US Circuit Court of Appeals hit developers with another setback, granting an administrative stay requested by environmental groups. According to analysts at Height Securities, a privately owned capital market firm, a successful attempt to delay construction could push the project's completion timeline to third-quarter 2021, back from an anticipated startup in mid-2021.