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ANALYSIS: Appalachian spot gas discounts fuel outbound transmission record, storage deficit

Highlights

Eastern Gas price spreads to Henry Hub, Chicago widen

Northeast outbound flows at record mid-summer high

Regional storage deficit to historical average tops 60 Bcf

Steep cash discounts at Appalachia's natural gas hubs are incentivizing record outflows to higher-priced markets this summer, leaving Northeast storage inventories trailing behind typical mid-summer levels.

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At Appalachia's benchmark upstream hub, Eastern Gas South, spot supply has averaged $2.88/MMBtu this month. While prices are up sharply from last July's month-to-date average of just $1.31, the hub's price differential to neighboring markets has actually widened, S&P Global Platt data shows.

In July, Eastern Gas has traded at a more than 80 cent discount to the US benchmark Henry Hub – more than double last July's month-to-date average discount of 37 cents.

Compared to the Chicago city-gate, Eastern Gas has averaged a nearly 63 cent discount, which has also widened from the hub's July 2020 average discount of about 35 cents.

Both Henry Hub and Chicago city-gate are roughly representative of downstream hub prices in the US Gulf Coast and the Midwest, respectively – both of which have become key destination markets for Appalachian gas in recent years.

This summer, comparatively cheap cash prices in Appalachia have made the two destination markets even more attractive for shippers looking to capture some of the current price spread. With more Appalachian gas leaving the Northeast this season, though, less supply has been made available for injection to storage.

Transmissions

In July, outbound gas transmissions from the Northeast have averaged 13.8 Bcf/d, marking a record high for mid-summer when strong storage and power burn demand typically keep more supply in region. Last July, net outflow from the Northeast averaged just 11.9 Bcf/d, S&P Global Platts Analytics data shows.

Markets in the Midwest have been a key destination for Appalachian gas this month with nearly half of the total outbound volume, about 6.8 Bcf/d, flowing westbound into the central US markets.

The Southeast has taken nearly as much, receiving an average 6.5 Bcf/d from the Northeast. Eastern Canada has been a comparatively minor destination with just 400 MMcf/d flowing north across the border.

Storage impact

With record Appalachian production volumes moving westbound to the Midwest and southbound toward the Gulf Coast, limited supply has remained available for injection to storage this summer.

Month to date, Northeast injection demand has picked up modestly to average about 2.8 Bcf/d – roughly at par with the five-year average injection pace in July, Platts Analytics data shows. Despite the uptick, Northeast inventories have consistently remained more than 60 Bcf below the five-year average this month.

With inventories currently estimated at 648 Bcf, the Northeast will need to expand stocks some 400 Bcf by early November to reach typical pre-winter inventory levels – a target that would likely require a significant increase in the pace of injections.

Given current cash-to-winter spreads in Appalachia, though, that may not happen.

In July, spot supply at Eastern Gas South has traded at just a 26 cent discount to both the January 2022 and February 2022 forward contracts – a paltry spread in comparison to the current cash-market discounts to Henry Hub and the Chicago city-gate. For the other peak-winter month of December, the spread is even narrower at just 19 cents, S&P Global Platts data shows.