Appalachian basis discounts widen as gas production ramps, mild weather persists

Rising gas production in the Appalachian Basin is putting cash basis prices at the region's upstream hubs under pressure this month as Northeast heating demand fails to keep pace with the recent supply gain.

At Appalachia's benchmark upstream hub, Eastern Gas South, cash basis has tumbled to a more than $1/MMBtu discount to the Henry Hub recently, down from a discount of closer to 30 cents earlier this month. Cash prices at various other production hubs in the region have followed a similar downward trajectory in recent trading, data from S&P Global Platts shows.

Downward pressure on regional basis comes as gas production in Appalachia tests record highs this month and mild weather keeps heating demand in check, allowing a nascent storage surplus to grow.

In December, gas production from the Marcellus and Utica shales briefly surged to a record high at over 34.8 Bcf/d. Month to date, production has averaged its highest on record at about 34.5 Bcf/d, data compiled by S&P Global Platts Analytics shows.

Recent production records were largely expected after at least two Appalachian producers said recently that they planned to dial up output this winter. On their respective third-quarter earnings calls, National Fuel Gas Company and Coterra Energy – formerly Cabot Oil and Gas, pre-merger with Cimarex Energy – said they would grow production to fill their respective leased capacities on Transcontinental Gas Pipe Line' newest expansion project, the 580 MMcf/d Leidy South Line.

After entering partial service in November, the Leidy South expansion got a green light from regulators to place in-service the project's final segment, Hilltop Loop, on Dec. 17.

Weather

Strong heating demand, typical of the Northeast in December, has so far failed to materialize this season. Month-to-date, residential-commercial gas demand has averaged about 12.2 Bcf/d, marking the region's lowest on record dating back to 2015, Platts Analytics data shows. Mild population-weighted temperatures, which have average about 43 degrees Fahrenheit this month, are the most likely culprit.

Current forecasts show the mild weather pattern continuing into early January, before turning sharply colder after the New Year. According to the National Weather Service's latest eight- to 14-day outlook, the Northeast and in particular New England will soon see an elevated risk for colder-than-average temperatures.

Storage

Mild Northeast weather through much of November and December has allowed regional storage inventories to recover from a long-standing deficit during the summer and autumn months.

On Dec. 27, Platts Analytics data showed Northeast inventory just below 843 Bcf, equivalent to a nearly 22 Bcf surplus to the prior five-year average. As recently as early November, the Northeast storage deficit had widened to more than 30 Bcf below average, fueling concern in the forward markets.

Since then, mild temperatures, weak heating demand and a lengthening supply balance in the Northeast have cooled forward-market bullishness. On Dec. 23, January forwards prices at Eastern Gas South settled at their lowest yet this heating season, ending trading at a 70 cent discount to Henry Hub, down from a 47 cent discount in late October, Platts' most recently published M2MS data showed.