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Appalachian gas basis tumbles amid rising supply, falling midstream capacity

Highlights

Dominion South trades at 63-cent discount to Henry Hub

Gas production up over 900 MMcf/d from April 2020

Pipelines to Southeast, Midwest near capacity limits

Basis prices at Appalachia's benchmark Dominion South hub are at their lowest in at least five years this April as lengthening supply and dwindling midstream egress capacity leave regional cash markets steeply discounted.

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Month to date, Dominion South has traded at an average 63-cent discount to the US benchmark Henry Hub, S&P Global Platts data shows. Prices at other upstream locations are seeing similar weakness.

At Texas Eastern M2 receipts, cash basis has averaged minus 65 cents this month. At Tennessee zone 4-300 leg, the region's weakest location, prices are averaging 72 cents below the benchmark.

Historically, basis prices in Appalachia often see a downturn in the spring and autumn shoulder seasons as mild weather zaps regional gas demand and drives up utilization on production-takeaway pipelines. This year, though, basis prices are hitting historic lows as growing supply length faces pushback from the region's production-takeaway pipelines, which are now collectively approaching capacity.

Fundamentals

While many of Appalachia's largest producers have committed to capital discipline and maintenance-level production this year, gas supply from the region has remained near record highs in 2021.

In April, output from the Marcellus and Utica shales has averaged over 33.2 Bcf/d – up more than 900 MMcf/d compared with the 2020 month-to-date average, S&P Global Platts Analytics data shows.

Over the same period, total gas demand in the US Northeast has declined to an average 18.5 Bcf/d this month, down from over 18.6 Bcf/d last April. Mild regional temperatures and higher outright cash prices this year are likely to blame for respective declines in residential-commercial and power burn demand.

April to date, population-weighted temperatures in the Northeast are up about 1.3 degrees Fahrenheit, leaving res-comm demand at just 8 Bcf/d this month – down nearly 225 MMcf/d on the year.

Higher outright cash prices in Appalachia and the Northeast, which are up about 50 cents across the board from April 2020, are the most likely culprit behind this year's decline in power burn demand. According to Platts Analytics, generator demand in the Northeast has averaged just under 6.3 Bcf/d this month to date, down from levels closer to 6.5 Bcf/d last April.

Midstream capacity

The steady decline in Appalachia's available production-takeaway capacity this year has compounded the market impact of this shoulder season's supply gains.

Month to date, net gas transmissions from the Northeast US to the Southeast, the Midwest and eastern Canada are actually up by a combined total of more than 1.9 Bcf/d compared with April 2020 levels.

While the US is shipping more supply to neighboring end-user markets, those pipeline corridors appear to be reaching their respective capacities. According to Platts Analytics, interstates carrying Appalachian supply to the Southeast are about 96% utilized this month, compared to an 89% utilization rate last April. Interstates to the Midwest, meanwhile, are currently flowing at over 99% of capacity, compared with utilization levels closer to 95% last April.

Outlook

In light of recent supply gains and capacity utilization rates, Appalachia's forwards gas markets are bracing for continued price pain through the summer months.

At Dominion South, the May to September calendar-month average is currently priced nearly 80 cents below Henry Hub. Last summer, the Appalachian location traded at just a 55-cent discount to the benchmark over the same five-month period. Across Appalachia, forwards traders are pricing-in similar weakness at various upstream locations across the region, S&P Global Platts data shows.