In our NATGAS Appalachia report published every week, we forecast basis for Eastern Gas South – in other words, at what premium or (more often) discount will Appalachian gas trade at compared to benchmark Henry Hub.
This week, we had the opportunity to present some of the key findings of the report at LDC Forums Northeast in Boston, MA where gas buyers and sellers come together to learn, network, and negotiate deals.
In that environment, one dynamic that caught people’s attention was the impact that swings in Henry Hub prices have on basis. It’s what we at RBN call the accordion theory and it basically goes like this:
As benchmark Henry Hub price rises, supply hub prices rise more slowly and so basis widens and when Henry falls, the supply hub prices decline more slowly so basis narrows.
So for example, if Henry hub were to rise to $10/MMbtu, we would expect that Appalachian prices would trade at a slightly larger discount, even though the underlying supply/demand/transportation fundamentals don’t change. And if Henry hub prices were to trade much lower, we would expect Appalachia basis to compress.
So if you think of what that would look like, basis would appear worse even though outrights might improve due to a stronger Henry and, vice-versa, basis might appear better even when outrights decline due to a weaker Henry.
Weird, right?
But we see it borne out in price data from Natural Gas Intelligence (NGI).
