Appalachia's Autumn 2022 natural gas basis discounts deepen as capacity concerns mount

Dwindling available pipeline capacity from the Appalachian Basin has forwards gas traders wary over the upcoming lower-demand shoulder season when basis prices could fall to their steepest discount in five years or more.

For the 2022 autumn season, forward gas prices at the region's benchmark hub, Eastern Gas South, are trading well below the location's cash-basis averages over the past four autumn seasons.

While the decline in basis prices during the fall months is nothing new in Appalachia, forwards markets appear more concerned over the potential depth of this season's drop. Over the past month, basis prices at Eastern Gas South for October 2022 have tumbled about 20 cents with the contract settling most recently at a $1.54/MMBtu discount to the Henry Hub.

After following a similar downward trajectory over the past 30 days, the September forward contract posted a gain of about 20 cents on Aug. 30 to settle at a $1.22 discount to Henry Hub in its first day of trading as the balance-of-month contract, according to the most recently published M2MS data from Platts, a part of S&P Global Commodity Insights.

This year's steep forward basis discounts at Eastern Gas compare with cash prices that averaged about 80 cents to $1/MMBtu behind the Henry Hub in September and October of 2021, 2020, 2019 and 2018.

In 2022, the more steeply discounted basis outlook comes as pipeline flows from Appalachia continue to brush up against capacity, posing a growing risk to in-basin prices at upstream hubs like Eastern Gas -- especially during the fall and spring shoulder seasons when gas demand ebbs.

In August, gas production from the Marcellus and Utica shales averaged nearly 34 Bcf/d, trending just below record highs with capacity on existing production takeaway pipelines maxed out and demand from regional end-users largely exhausted. According to Platts Analytics, Appalachian production is now effectively capped out around its current level until more midstream capacity its added.

Weather, LNG maintenance

This fall, the strength of regional demand will be critical in determining the depth of Appalachia's upstream basis price woes. According to a recent forecast from the National Weather Service, much of the Northeast, stretching from Maryland to Maine, is at risk for above-average temperatures in September, October and November -- potentially keeping weather-related demand in a kind of no man's land where neither cooling nor heating demand is driving the market.

Another key factor this fall is the timing and duration of annual maintenance at the Cove Point LNG export facility, which has historically come between mid-September and early October. Over the past four years, autumn maintenance at the Maryland terminal has effectively zeroed out feedgas demand for a sustained period of about three weeks, taking offline about 750-800 MMcf/d in daily demand.

This fall, the timing of Cove Point's presumed maintenance could push supply back into the Northeast gas market during a period of exceptionally mild temperatures, potentially pushing basis prices to a more-than-$2/MMBtu discount to the Henry Hub -- a scenario not seen since late October 2020.