Danger Zone - The Outlook for the Appalachian Natural Gas Market

It’s been a while since the Appalachian natural gas market has looked this bullish. Outright cash prices at the Eastern Gas South hub are at multi-year highs. Regional storage inventories are sitting low, setting the stage for supply shortages and still higher prices this winter. But the potential for severe takeaway constraints and basis meltdowns are lurking, and by next year, they could become regular features of the market again like they were in the 2016-17 timeframe, or worse — at least in the spring and fall when Northeast demand is lowest. Regional gas production is still being affected by maintenance and has been somewhat volatile lately as a result, but it averaged 34.5 Bcf/d in June, just 300 MMcf/d shy of the December 2020 record. What’s more, at current forward curve prices, supply output could surpass previous highs by next spring and grow by ~ 5 Bcf/d (15%) by 2023. Outbound flows set their own record highs this spring, running at over 90% of takeaway capacity, and will head higher, which means that spare exit capacity for supply needing to leave the region is shrinking. The handful of planned takeaway expansions that remain are facing environmental pushback and permitting delays, and the few that are targeting completion in the next year may not be enough. Today, we provide the highlights of the latest forecast from our new NATGAS Appalachia report.

The U.S. Northeast has only been a year-round net gas supply region to the U.S. for about six years now, though it has been sending gas to other regions for longer than that on a seasonal basis. But for much of that time, Appalachian gas production was constrained and growth was wholly dependent on the next takeaway capacity expansion. As such, regional gas producers were vulnerable to severe price discounts whenever production growth outpaced capacity additions, and it wasn’t unusual to see outright prices devolve to a fall nadir below $1/MMBtu (dashed-red ovals in Figure 1). That changed in 2018, however. After a slew of expansion projects came online in the 2016-18 timeframe, producers had some running room for the first time in a long while. Capacity was finally outpacing supply leaving the region — as we discussed in our Dog Days Are Over blog series and Drill Down report — and basis (the local price vs. national benchmark Henry Hub) at Eastern Gas South (EGS; formerly Dominion South), Appalachia’s gas benchmark hub, strengthened.

Regional gas producers didn’t catch much of a break, however. Gas-weighted producers, including in Appalachia, began tightening their belts and pulling back rigs in 2019 in response to overall bearish fundamentals for gas, an extended period of lower gas prices, and shrinking appetite for capital investment. Then came the COVID-19 pandemic and the resulting demand destruction, including LNG export demand. For Appalachian gas producers, that meant still more belt-tightening, laying down more rigs (and shifting the remaining rigs to more efficient, liquids-rich areas), and, as we discussed in Flick of the Switch, low price-driven shut-ins of existing production in the shoulder months to ride out the low pandemic prices. In spite of all that, according to pricing data from our friends at NGI, outright prices at EGS averaged just $1.40/MMBtu last year — the lowest annual average we’ve seen in the Shale Era for the hub — and they bottomed out at a single-day record low of $0.28/MMBtu on November 9, 2020 (dashed orange oval), back into the “danger zone.”