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Headed for Heartbreak, Part 5 - Appalachia Gas Flows to the Midwest Rising, But Constraints Loom

This time last year, Appalachian natural gas production was approaching a steep springtime ledge as regional prices sank below economic levels and producers responded with real-time shut-ins. This year to date, regional gas prices have averaged $0.80-$0.90/MMBtu above 2020 levels for the same period, and production has been averaging more than 1 Bcf/d above year-ago levels. If production holds steady near current levels, the year-on-year gains would just about double to ~2 Bcf/d by mid-May, which is when the bulk of the springtime curtailments first took effect in 2020. This, just as Northeast demand takes its seasonal spring plunge, which means regional outflows are poised to rise in the coming weeks, potentially to record levels. How much more can the Appalachian takeaway pipelines absorb? In today’s blog, we continue our analysis of outbound capacity utilization, this time focusing on the routes to the Midwest.

This is Part 5 of our blog series breaking down the fundamental trends in the constantly evolving Appalachian gas market. In Part 1, we looked at the Northeast gas supply-demand trends that contributed to increased takeaway constraints and weaker Appalachia basis differentials in 2020, namely milder winter demand in early 2020 that led to record high storage levels, despite low rig counts and producer cutbacks in the spring and fall. Then, in Part 2, we delved deeper into Appalachian production and the disparate patterns emerging in each of the sub-regions.

We shifted our focus to regional outflows and takeaway capacity utilization in Part 3, starting with a look at the record outflows during Winter Storm Uri in February, and a few weeks ago, in Part 4, we began a pipe-by-pipe analysis of Appalachia’s supply takeaway routes, starting with the Southeast and Gulf Coast corridors. From our analysis of those pipeline flows, we concluded that utilization on the six pipelines flowing south out of Appalachia averaged 80% in 2020 and was approaching 90% by the end of last year. Moreover, flows sustained at high rates through much of winter, and in March, they were averaging about 700 MMcf/d higher than last year, leaving less than 1.5 Bcf/d of upside potential for outflows heading into the spring season. Since our late-March analysis, southbound flows have fluctuated somewhat, largely driven by weather swings in the Northeast, but overall have climbed further, averaging 92% of capacity in April to date and even filling to more like 96% on some days.

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