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Gas supply gains thwart winter forwards rally in Appalachia, US Northeast

Highlights

Marcellus, Utica production surpasses 34.6 Bcf/d

Northeast inventory deficit narrows to 11 Bcf

Leidy South, FM100 set for in-service Dec. 1

Rising natural gas supply in the Appalachian Basin and the US Northeast market area is weighing on bullish sentiment in the forward gas market as the region's winter 2021-22 outlook continues to cool.

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Since the start of November, gas production from the Marcellus and Utica shales has surged, rising by nearly 1 Bcf/d, or about 2.7%, to near-record highs in the upper 34 Bcf/d range.

The Northeast region's gas storage deficit has also continued to narrow this month, adding to the region's lengthening supply balance. After falling more than 70 Bcf below average in early September, inventory levels – now estimated around 946 Bcf – are just 11 Bcf below the prior five-year average, S&P Global Platts Analytics data shows.

The recent supply gains have cooled bullish sentiment in the forward market.

Since late October, Appalachia's benchmark upstream hub, Eastern Gas South, has seen calendar-month forwards prices for December, January and February fall by more than $1 to the mid-$4s/MMBtu – now at par with levels recorded last winter.

In the Northeast market-area, winter forwards have witnessed a similar decline recently. At the New York metro-area's Transco Zone 6 NY hub, peak-winter prices for January and February are down as much as $2 since late October, with both now trading in the low- to mid-$10s/MMBtu, S&P Global Platts most recently published M2MS forwards data shows.

Buoyant gas production

While the Utica and Marcellus shales have both seen production gains this month, the bulk of the region's additional supply has come from the Marcellus.

Gas production in the Marcellus has repeatedly minted fresh record highs this November, after first crossing the 28 Bcf/d threshold on Nov. 6. The most recent high was 28.24 Bcf/d Nov. 28, according to Platts Analytics data.

These increases have accelerated as the Dec. 1 in-service date for two pipeline capacity expansion projects draws near, with Nov. 23-29 Marcellus production averaging 360 MMcf/d higher than the prior seven days (Nov. 16-22).

The larger of the two projects is Williams' Leidy South expansion, which will add approximately 580 MMcf/d of capacity on Transco pipeline system to move gas out of Pennsylvania to the Mid-Atlantic region. The second project is National Fuel Gas Company's FM100 expansion and modernization project, which will provide around 330 MMcf/d of firm transportation capacity from National Fuel's production areas in northern Pennsylvania to Transco's Leidy Hub.

Coterra Energy – formerly Cabot Oil and Gas, pre-merger with Cimarex Energy – and National Fuel Gas Company have reserved the additional Transco firm transportation capacity that the Leidy South capacity will provide.

With Appalachia producers wary of supply overwhelming takeaway capacity out of the basin, just Coterra and National Fuel Gas have announced plans to intentionally expand production this winter.

Already, pipeline nomination data shows that flows past Transco's Leidy Line Station 517 have risen to average 2.31 Bcf/d month-to-date, up from 2.1 Bcf/d in October. On Nov. 17, National Fuel and Transco filed a request with the Federal Energy Regulatory Commission to allow National Fuel to lease Transco approximately 255 MMcf/d of the FM100 capacity whenever Transco is able to begin flows on the pipeline until Leidy South is completed, suggesting that flows have already started in earnest.

Utica production has also risen month-over-month, up around 150 MMcf/d from October to average 6.15 Bcf/d so far this November. Despite the recent gains, Utica production remains well below the production levels reached in 2018 and 2019, when volumes often exceeded 7 Bcf/d.

Outlook

The Leidy South and FM100 expansion projects are expected to enter full service on Dec. 1, which could put downward pressure on Mid-Atlantic spot gas prices as more supply flows towards that region.

Once the additional capacity from Leidy South is filled, the outlook dims for additional Appalachia gas production to come online this season. Platts Analytics projects that, beyond the gains associated with the expansion projects, Northeast production will remain largely flat through the end of the year.