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ANALYSIS: Appalachia autumn 2021 gas forwards push record levels as regional balance tightens

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ANALYSIS: Appalachia autumn 2021 gas forwards push record levels as regional balance tightens

Highlights

September, October rise 60 cents to upper-$2.20s/MMBtu

Northeast power burn sets June record high at 9.3 Bcf/d

Regional storage at 583 Bcf, now 10% below average

Autumn-season forwards prices at Appalachia's benchmark upstream hub, Eastern Gas South, are pushing historic highs in late June as record power burn and flat production continue to strain the region's supply balance, leaving storage inventories trailing five-year average levels.

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Over the past two weeks, calendar-month prices for September and October are up about 60 cents, or roughly 35%, settling at $2.29 and $2.26/MMBtu, respectively, on June 28, S&P Global Platts' most recently published M2MS data shows.

During past autumn seasons, cash prices at Eastern Gas – formally known as Dominion South – have hit annual lows from late-September to mid-October, often falling below $1/MMBtu.

This rise in Appalachia's forwards gas prices comes amid a sustained rally in the cash market where prices have recently zoomed past the $3 mark, or their highest since this winter's historic freeze.

Record power burn and relatively flat supply growth have fueled the spot market's rise in late June, but the knock-on effect to this summer's storage build is likely the key driver behind the forward rally.

Supply and demand

Month to date, power burn demand in the US Northeast has averaged about 9.3 Bcf/d, setting a record for the June monthly average, data compiled by S&P Global Platts Analytics shows.

On June 28, as this summer's second heat wave pushed temperatures across the Northeast into the mid- to upper 90s Fahrenheit, regional gas-fired power demand climbed to its highest-ever recorded level for the month of June at 12.2 Bcf/d. Over the next week, gas demand from generators should ease to an average 9.4 Bcf/d as temperatures across the region retreat into the 80s.

According to a month-ahead forecast from the National Weather Service, though, states stretching from New York to Maine face a 50% to 60% risk for above-average temperatures in July, meaning that more sweltering heat is soon likely to visit the region, bringing with it the potential for new power burn records.

While demand continues to outperform this summer, Northeast supply has remained relatively flat. In June, Appalachian Basin gas production has averaged about 33.65 Bcf/d – up about 400 to 500 MMcf/d from levels recorded in May and April, but slightly lower compared to its 2020 exit rate.

Storage

Record power burns and elevated outflows from the Northeast this summer have stretched Appalachia's upstream supply to its limit recently, leaving less gas available for injection to storage.

Since the start of May, the region's storage deficit has more than tripled to an estimated 64 Bcf, or about 10% below its five-year average level, according to Platts Analytics data.

At 583 Bcf, storage reserves will need to rise by over 400 Bcf to reach typical pre-winter inventory levels – likely requiring an accelerated pace to injections during the upcoming shoulder-season month of September and October.

Incentivizing injections into regional Northeast storage may require further price strengthening, though. Since the start of May, the forward basis discount at Eastern Gas has actually widened, with September and October now trading around a $1.30/MMBtu discount to Henry Hub, down from a roughly $1.15/MMBtu discount eight weeks ago, S&P Global Platts data shows.