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Rebound in US gas production unlikely to dampen bullish winter sentiment

New York — • Output tops 90 Bcf/d on gains in Appalachia, offshore

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• Dec, Jan, Feb forwards average settles at $3.35/MMBtu

As US natural gas production climbs to its highest in nearly six months, forwards markets continue to anticipate tighter supply and higher prices for the upcoming winter season.

From Oct. 17 to Oct. 19, domestic production edged up to its highest since late April, averaging over 90 Bcf/d as output from Appalachia and the offshore Gulf of Mexico rebounded from recent declines, data compiled by S&P Global Platts Analytics shows.

In Appalachia, output has climbed about 1.5 Bcf/d over the past week amid signs that some producers could be easing up on recent well curtailments ahead of the winter heating season. In September and early October, several major Appalachian producers, including EQT, Cabot Oil & Gas and CNX Resources, had announced decisions to cut production in response to weaker prices.

In the Gulf of Mexico, output is also up about 1.5 Bcf/d over the past week as offshore producers resume operations at platforms previously shuttered by category 4 Hurricane Delta.

While the recent gains have propelled output beyond its stagnant summer range at around 86 Bcf/d to 88 Bcf/d, forwards traders continue to see compelling reasons to remain bullish on winter gas prices.

On Oct. 16, benchmark Henry Hub forwards prices for the peak-demand months of December, January and February settled at $3.27, $3.41 and $3.36/MMBtu, respectively – just 3 cent to 7 cents below annual highs in late September, S&P Global Platts most recently published M2MS data shows.

Supply outlook

The bullish outlook comes as many market observers continue to anticipate headwinds for US production, which remains sharply below its November 2019 record-high average at 95 Bcf/d.

Earlier this year, commodity-market volatility prompted many producers to cut drilling budgets and rig counts and even curtail production temporarily. As a handful of producers bring rigs back to the Permian and other basins, and some previously curtailed wells are restored, the recent and modest turnaround doesn't appear likely to quickly restore US output to its previous growth trajectory.

On Oct. 14, the weekly US rig count was estimated at 336, up from a 15-year low at 279 in July. Earlier this year, the rig count had totaled over 840, according to recent data published by Enverus DrillingInfo.

A recent forecast from S&P Global Platts Analytics shows US production continuing to sputter over the next year, remaining around 87 Bcf/d amid declines in associated gas production from the largest oil-heavy basins.

During the upcoming heating season, US production is expected to remain about 8 Bcf/d below its winter 2019-2020 level, potentially causing a significant supply shortfall despite high pre-winter inventory levels.

As of the week-ended Oct. 9, US stocks are estimated at 3.877 Tcf, according to the US Energy Information Administration. While inventories remain some 335 Bcf above the five-year average, peak deliverability could still be a major concern this winter.

In winters past, capacity limits on storage withdrawals have limited available gas supply when and where it is needed most. With production continuing to flounder, though, end-user dependence on storage supplies could be significantly heighted this winter.