Leidy South supports Appalachia cash basis as mild weather poses downside risk

The startup of partial service on Transcontinental Gas Pipe Line's Leidy South expansion has helped to keep basis prices in Appalachia afloat recently, despite a surge in Marcellus production. With heating demand trending at a six-year low, though, mild weather now poses an emerging threat to prices.

In November, Transco received a green light from regulators to begin partial service on its expansion, bringing online some 225 MMcf/d of the project's planned 582 MMcf/d capacity. The project's full capacity is expected to enter service sometime this mohth.

The partial startup on the expanded line has coincided with a nearly 1 Bcf/d surge in Appalachian production over the past month. In December, combined output from the Marcellus and Utica has averaged its highest on record at nearly 34.4 Bcf/d, S&P Global Platts Analytics data shows.

More granular data shows that much of the production surge has been heavily concentrated in central and northeast Pennsylvania, where the Leidy South expansion has recently added new capacity. In the central dry window, output is up about 70 MMcf/d since late October. In the Northeast dry, production has climbed about 250 MMcf/d.

Despite the production gains, basis prices in Appalachia have trended close to historical levels for late autumn. Month to date, the cash market at Eastern Gas South has averaged a 63 cents discount to the Henry Hub which compares with a 67 cents discount last December, S&P Global Platts data shows.

Weather

While production gains have thus far had little impact on Appalachian basis prices, mild weather and weak heating demand now pose a separate but growing risk for the Northeast.

In December, Northeast residential-commercial gas demand has averaged just 11.9 Bcf/d – its lowest month-to-date average on record dating back to December 2015, Platts Analytics data shows.

The trend looks poised to continue, too. Over the next seven days, Northeast population-weighted temperatures are forecast to average over 42 degrees Fahrenheit, or about 5.5 degrees above normal. The mild weather would keep regional heating demand to just 12.3 Bcf/d – nearly 26%, below average.

With mild temperatures prevailing across most of the US, producers and shippers moving Appalachian gas are also faced with historically weak demand in key destination markets such as the Midwest and the Southeast.

In the Midwest, temperatures are forecast to average about 6.7 degrees above normal over the next week. In the Southeast, the deviation above normal is forecast at over 10 degrees.

The seasonal weather forecast looks equally bearish for heating demand. In its latest three-month outlook, the US National Weather Service predicted a 40% to 60% risk for above-average temperatures in the US Northeast from December through February with New England at the higher end of the range.

Forwards

Recent production gains and mild weather have thus far shown little impact on forward market sentiment – a factor that could change quickly if the dual trends continue.

At Eastern Gas South, first-quarter 2021 basis prices settled Dec. 10 at an average 57 cent discount to Henry Hub – down just 6 cents since the start of November. The 2022 curve has also remained largely unaffected by the shifting outlook for supply and demand, with calendar-year prices also down just 6 cents since early November to an average 80 cents discount to Henry Hub, S&P Global Platts' most recently published M2MS data shows.