Dog Days Are Over, Part 2 - Have Northeast Natural Gas Supply Prices Turned a Corner?

The Marcellus/Utica region is in the midst of a major turning point. Natural gas production from the region continues to post record highs. But regional basis differentials to Henry Hub are the strongest they’ve been at this time of year since 2013. Spot prices at Dominion South — the representative location for the overall Marcellus-Utica supply — averaged at a $0.35/MMBtu discount to Henry Hub this August, compared with a $1-plus discount to Henry in each of the past four years. The deep discounts in previous years reflected the inadequate takeaway capacity and the resulting pipeline constraints to get gas out of the region. Now, basis shifts suggest those constraints are easing somewhat — a trend that will redefine pricing relationships across the broader gas market. In today’s blog, we continue a series examining the changing flow and price dynamics in the Northeast gas market.

The Permian has been the supply basin du jour of late, but when it comes to natural gas production growth, there’s no competition — the Marcellus/Utica is still second to none. As we noted in Part 1 of this series, of the 8-Bcf/d increase in total Lower-48 production this year, 50% has come from the Northeast. Figure 1 below puts that Marcellus/Utica growth into perspective with its West Texas counterpart, using historical production data from our good friends at OPIS PointLogic. Permian gas production — from West Texas (gray layer in the graph) and southeastern New Mexico (green layer) combined — has more than doubled over the past five years, from nearly 4 Bcf/d in 2013 to upwards of 8 Bcf/d now. Nearly half of that Permian growth has occurred in the past year alone. But compared with the Marcellus/Utica, the Permian’s growth may as well be a rounding error. Marcellus/Utica volumes — shown by the blue area— also more than doubled in the five years since 2013, but the difference in magnitude is staggering. In the time Permian added 4 Bcf/d, the Marcellus/Utica has climbed four times that — by 16 Bcf/d — to an average of 28 Bcf/d in 2018 to date, up from about 12 Bcf/d in 2013.