The Northeast natural gas market this past spring and early summer averted a major meltdown, as production shut-ins, record cooling demand, and increased outflows helped the region balance. But the fall shoulder season is liable to be less forgiving, given that storage levels are much higher and carrying a surplus to prior years. Now, shut-in wells are back online for the most part and production has surged. In-region demand has been at record highs, but summer cooling demand will peak soon and give way to balmy fall weather. As that happens, the Northeast will increasingly rely on outbound flows to offset a growing supply imbalance. But pipeline capacity utilization for routes moving gas out of the region have been running high already. How much incremental volumes can the takeaway pipelines absorb before constraints develop and hammer regional supply prices? Today, we analyze flows and capacity out of the region.
We’ve looked at Marcellus/Utica gas pipeline takeaway capacity in-depth before in blogs like the Room at the Top series and before that the Dog Days Are Over series. In past years, our discussion of takeaway capacity was in the context of a market that was severely oversupplied and constrained year-round and largely at the mercy of pipeline projects to increase capacity out of the region. By late 2018, however, the bulk of the pipeline expansions were completed and online; after years of being reined in, the Northeast finally had sufficient, even excess, takeaway capacity and was largely relieved of constraints. But as we saw in fall 2019 — and wrote about in Punching Bag — the Appalachian supply region is not entirely free and clear; it remains susceptible to congestion and takeaway constraints during low-demand “shoulder” periods in the spring and fall when there is a greater surplus of gas volumes needing to leave the area.
This fall, the situation could be even worse and may force producers to shut-in gas for a second time this year. As we discussed in detail last week in Part 1, producer shut-ins starting in May and record cooling demand have helped tighten the Northeast region’s supply-demand balance and prop up prices relative to the national benchmark Henry Hub. But shut-in wells were brought back online last month, and pipeline flow data from our good friends at Genscape shows that local production surged to an average 32.5 Bcf/d in the second half of July, up 1 Bcf/d from the first half of the month. That, combined with the reality that storage levels are high and carrying surpluses to prior years, is setting up the region for major constraints as local demand experiences seasonal declines this fall. The fundamentals imply that record amounts of gas may need to flow out of the Northeast in order to balance the region. To make that happen, Marcellus/Utica gas would have to price itself to move as much as possible out of the region, regardless of whether there is sufficient demand downstream. Because if that’s not enough either, producers would need to resort to shutting in wells again. (EQT Corp., which led the Northeast production shut-ins this spring and early summer, indicated in its earnings call last week that while it is well-hedged, another round of shut-ins is not out of the question for late summer and fall if economics worsen.)
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