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Commodities 2021: Appalachia gas prices likely discounted in 2021; market dislocation widens

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Commodities 2021: Appalachia gas prices likely discounted in 2021; market dislocation widens

Highlights

Dwindling egress capacity limits Gulf market access

Sub-$1 prices could become new normal in autumn

Mountain Valley Pipeline could lift prices on startup

New York — Appalachian producers could see heavily discounted gas prices with increasing frequency next year as buoyant production and constrained pipelines limit access to premium markets beyond the region.

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This autumn, as cooler temperatures and rising export demand lifted US gas prices to annual highs, Appalachia's Dominion South market was left trading at just a fraction of benchmark Henry Hub gas.

On Oct. 26, cash prices at the Henry Hub surged to a 19-month high at $3.08/MMBtu, propelled by gains in residential-commercial heating, LNG feedgas and industrial-sector demand.

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With limited access to the premium Gulf Coast market and mild temperatures persisting in the Northeast, gas prices at Dominion South languished, settling at just $1.70/MMBtu that day. Just over one week later, Dominion's cash market would fall to its lowest settlement price on record at just 27 cents/MMBtu, data from S&P Global Platts shows.

While steep autumn-season discounts at Northeast production hubs are nothing new, multiyear basis-price lows recorded this fall reflect the increasingly insular character of the Appalachian gas market. In fact, the last time basis prices came close to this year's lows was in October 2017 – just prior to the startup of full service on the 3.4 Bcf/d Rover Pipeline and several other critical expansion projects.

Fundamentals

According to S&P Global Platts Analytics, nearly every interstate production-takeaway pipeline from Appalachia has now reached or is nearing its capacity limit. With no major expansion projects currently on the horizon, the region's dwindling egress capacity is reshaping market dynamics in Appalachia – making production, demand and storage key drivers for price outcomes there.

In September, October and November, Appalachia producers appeared to make almost daily adjustments to production based on weather, demand and prices. Over the three-month period, those variables appeared to reliably predict production levels, with output hitting successive annual lows around 30 Bcf/d and record highs at over 34 Bcf/d – sometimes within a matter of days – as prices at Dominion South moved between 16 cents and $1.91/MMBtu.

With no additional egress capacity planned, those market dynamics are likely to remain unchanged in 2021 – especially during the autumn and spring shoulder seasons when demand is low.

Through late November, downward pressure on prices from production was also exacerbated by this year's persistently high storage level – another factor that's likely to remain unchanged in the years ahead.

On Nov. 15, inventories in the Northeast climbed to their highest in nearly a decade at over 1.06 Tcf, data compiled by Platts Analytics shows. High storage levels in Appalachia will likely become increasingly frequent in future autumn seasons, assuming no major changes to the region's production or midstream capacity.

Outlook

As of late December, Dominion South calendar-month prices for January, February and March continue to trade around $2/MMBtu, signaling the market's expectation that bearish prices could continue through the winter months.

While prices over $2 likely come as a welcome blessing for Appalachia's producers, the market environment this autumn – and possibly even this winter – offers a glimpse of what could become the new normal for the region's gas industry.

One potential bright spot for Appalachian producers is the 2 Bcf/d Mountain Valley Pipeline, which is now over 90% complete, according to an estimate from project developers. Upon completion, the pipeline will offer incremental egress capacity to the basin's producers, but it could also become the last major takeaway project in the region to enter service.

Amid significant opposition to the project from environmental groups, the pipeline has faced multiple legal hurdles to its construction, delaying its startup date into 2021. Most recently, the 4th US Circuit Court of Appeals on Nov. 9 issued a stay at the request of environmental groups, effectively halting construction work at water crossings amid pending litigation.

While the Federal Energy Regulatory Commission this fall allowed some construction to resume, that too is facing a new legal challenge.

Green groups Dec. 22 filed a petition in the DC Circuit Court of Appeals contesting an Oct. 9 FERC decision to partially lift a stop-work order. That petition also challenges a two-year extension of the project's certificate authorization.

A certificate amendment MVP proposed that would allow it to use alternative water crossings for 70 miles of the route is also drawing environmental group pushback in the FERC dockets.