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Appalachia's drilling slowdown to drive Northeast gas prices higher this winter

Highlights

Market-area hub prices up from 2019

Regional gas production up just 1.1 Bcf/d from 2019

Slowed drilling to limit balance-20 output growth

Denver — Northeast market-area hubs are bracing for sharply higher gas prices this winter as the limited production gains from Appalachia are stretched thin by stronger demand in regional and neighboring markets.

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At key downstream locations including Algonquin city-gates, Transco Zone 6 New York and Tennessee Zone 6 delivered, December-January-February forward strip prices are averaging $6.63/MMBtu, $6.03/MMBtu and $6.61/MMBtu, respectively.

Last winter, cash prices at all three downstream hubs were cheaper over the same period, by about $3-$4/MMBtu, data from S&P Global Platts shows.

Higher market-area prices this winter will result in part from limited regional supply growth. From Jan. 1 to date, Appalachian Basin gas production has averaged about 32.2 Bcf/d, outpacing the 2019 year-to-date average by just 1.1 Bcf/d – a relatively modest gain compared to recent years.

While daily production from the Marcellus and Utica has largely remained above its corresponding 2019 levels this year, recent cuts in drilling activity could see output fall below that threshold by the fourth quarter.

Last November, regional production climbed to its highest on record at over 33.5 Bcf/d.

With the Marcellus and Utica rig count now hovering around 31, or its lowest since mid-2016, regional production will likely remain comfortably below that prior record high through at least the fourth quarter, data from S&P Global Platts Analytics and Enverus DrillingInfo shows.

Adding to the potential supply risk, Northeast storage inventories, estimated Sept. 9 at 928 Bcf, have continued narrowing their surplus to the five-year average. After ballooning to a more-than-130-Bcf surplus earlier this year, inventories are now just 73 Bcf/d higher compared with the five-year average level.

Demand

According to Platts Analytics, a return to 10-year average temperatures in the Northeast this winter would see residential-commercial heating demand outperform compared to 2019.

From December to February, normal winter temperatures in the Northeast would boost heating demand to an average 16.1 Bcf/d. Over the same period last winter, milder weather left regional res-comm demand at just 15.2 Bcf/d.

In addition to stronger regional consumption, a forecast uptick in LNG export demand this winter should drive more Appalachian gas supply southbound to Gulf Coast terminals.

By mid-winter, stronger global gas prices could see US terminals test newly installed capacity limits, boosting feedgas levels to over 11 Bcf/d, up from current levels around 6 Bcf/d.

According to Platts Analytics, that incremental demand would boost northeast to southeast gas transmissions to over 5 Bcf/d from December to February, compared to an average 4.85 Bcf/d over the same period in 2019.

Supply-area hubs

While downstream consumers in the Northeast will likely pay sharply higher gas prices this winter, forward markets aren't expecting producers to benefit equally from the uptick as limited midstream capacity leaves some production stranded in-basin.

At key upstream hubs like Dominion South, Columbia Gas Appalachia and Texas Eastern M2, the December-January-February forward strip is currently priced at an average $2.84/MMBtu, $3/MMBtu and $2.88/MMBtu, respectively. Over the same three-month period last winter, cash prices at the same three hubs were about $1.20/MMBtu lower, S&P Global Platts data shows.