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The Waiting Game, Part 2 - Northeast Gas Production Cutbacks Tighten Regional Balance, For Now

U.S. Northeast natural gas production has tumbled nearly 900 MMcf/d in the past month alone since EQT Corp., Cabot Oil & Gas, and others began curtailments in response to low gas prices, and is averaging nearly 2 Bcf/d below last November’s peak of 32.9 Bcf/d. But regional gas demand has lagged this year, storage inventories have surpassed five-year highs and outbound flows to the Gulf Coast are being challenged by reduced takeaway capacity and drastically lower demand from LNG export facilities.  Today, we examine the net impact of these competing fundamental factors on the region’s supply-demand balance and the resulting implications for Appalachian supply prices.

The potential for an extended period of lower crude oil prices has opened a window of opportunity for the gas-focused Marcellus/Utica production region — lower oil prices and a prolonged pullback in oil-directed drilling, the thinking goes, would curb associated gas production from those wells, possibly tightening the gas supply-demand balance and boosting gas prices enough to spur more gas-directed drilling.

But, as we said in Part 1 of this series, in the near term, Northeast gas producers, who only in the past year or so emerged from a years-long battle with pipeline constraints, are facing new challenges to regional supply growth. Appalachian producers began laying down rigs and slashing capital spending last year, well before either the oil market mayhem or COVID pandemic hit, in response to sub-$2.00/MMBtu natural gas prices in the region and overall weakness in Henry Hub benchmark futures prices. That price pressure has not let up since, as the regional and national storage inventories continue carrying hefty surpluses versus prior years. Additionally, LNG exports — a key driver of gas demand for U.S. production, including a large chunk of Marcellus/Utica outflows — have slowed dramatically, as the economics behind sending U.S. gas overseas have collapsed and LNG cargoes are being cancelled in droves (see Keep On Pushing and RBN LNG Voyager for more). We should note too that the reduced demand for feedgas demand at liquefaction and LNG export facilities has coincided with restricted southbound capacity to the Gulf Coast from the Northeast, following an explosion in early May 2020 on the Texas Eastern Transmission pipeline, or TETCO. Much of the production that was previously flowing south on TETCO was rerouted to other takeaway pipes, so this hasn’t necessarily affected overall supply volumes, though it may have shifted the direction of some of the flows.

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