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ANALYSIS: Dominion South market rally pushes Appalachian gas production toward record

Highlights

Cash price surges to $2.44/MMBtu in Jan 12 trading

Jan-Feb-Mar forward average settles at $2.27/MMBtu

Appalachian production steady in upper 33 Bcf/d area

New York — Recent strengthening in Appalachia's cash and forward natural gas markets is lifting regional production toward record highs this month as operators there book their highest prices since November 2019.

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Over the past week, the cash market at Appalachian benchmark Dominion South has averaged over $2.30/MMBtu. On Jan. 12, spot prices surged another 17 cents, climbing to a fresh 14-month high at $2.44/MMBtu, intraday trade data from Intercontinental Exchanged showed.

In the forward market, prices for January, February and March are now averaging $2.27/MMBtu, or their highest since mid-November, S&P Global Platts' most recently published M2MS data shows.

Bullishness in Appalachian markets has prompted many producers to dial up output in response. In January, combined production from the Marcellus and Utica has averaged 33.8 Bcf/d – just 460 MMcf/d below its single-day record high in mid-December, data from S&P Global Platts Analytics shows.

Demand, storage

Rising prices in Appalachian gas markets come as demand in the US Northeast trends near seasonal highs and as regional storage inventories rapidly narrow their surplus to the five-year average.

In January, Northeast demand has averaged about 29.5 Bcf/d, or its highest since last winter. According to Platts Analytics, regional demand would need to remain around its current level through the end of January to perform at par with its weather-normal average.

So far this month, stronger demand has helped to draw down the Northeast gas storage surplus. As of Jan. 12, regional inventories are estimated at 760 Bcf, according to Platts Analytics data. After trending more than 85 Bcf above the five-year average earlier this winter, the Northeast storage surplus has now dwindled to just 19 Bcf.

Weather

Over the next two weeks, the Northeast faces a 33% to 40% risk for above-average temperatures, according to an eight- to 14-day outlook from the National Weather Service – potentially a risk to both regional gas demand and prices.

In just the past week, though, meteorologists have expressed growing concern over the possibility for extreme cold to develop in the central and eastern US by later this month – potentially giving the Northeast market another major boost.

Recent forecasts from the Weather Company, AccuWeather and others suggest that the polar vortex – which typically remains centered over the North Pole – could move southward, bringing snow and frigid cold temperatures to the US Midwest and East Coast by late January and potentially into February.

In addition to pushing demand higher, polar vortex weather could significantly draw down Northeast storage inventories and cause production freeze-offs, further tightening regional supply.