You've Got Your Troubles, Part 3 - Seasonal Demand Declines, Production Curtailments Hit Appalachian Gas Market

As U.S. natural gas spot and futures prices retreated in the past week, the price of gas at Appalachia’s Dominion South hub fell as low as $0.735/MMBtu, the lowest since fall 2017, before partially rebounding yesterday to about $1.10/MMBtu, according to the NGI daily gas price index. Moreover, the forwards market indicates sub-$1/MMBtu prices are in store for October as well. The regional supply hub didn’t weaken quite as much as prices at the national benchmark Henry Hub, which collapsed in recent days on demand losses — from cooler weather, storm-related power outages, and disruptions to LNG exports — and storage levels in the Gulf Coast region that are well above average and approaching peak capacity levels. The relative support for prices in the Northeast is in part due to a second round of production shut-ins by EQT Corp., which took effect September 1. But seasonal demand declines are underway; the Dominion Energy Cove Point LNG facility in Maryland just went offline for its annual fall maintenance, placing additional pressure on already-packed storage fields and takeaway pipelines; and pipeline maintenance events are reducing outflow capacity and curtailing production. Altogether, that signals more volatility ahead. Today, we provide an update on the fundamentals driving the Northeast gas market.

When we last checked in on the Northeast gas market in late July (see You’ve Got Your Troubles Part 1 and Part 2), there already were signs of trouble. Following a mild winter and despite pandemic-induced demand disruptions, Appalachian producers had managed to eke past the low-demand spring season without a price meltdown by shutting in production and increasing flows out of the region. But by late July, LNG cargo cancellations were in full swing. Production shut-ins led by EQT from mid-May through mid-July were roaring back online. Appalachian production volumes, after almost flattening out to year-ago levels in June, had surged back to 2020 highs that surpassed pre-shut-in levels and were approaching the region’s all-time highs seen in late 2019. Northeast demand was also strong and setting records. But storage and takeaway capacity fears were brewing for fall shoulder season as storage levels were already high and reflecting surpluses to prior years after the mild winter, and pipeline capacity utilization for routes moving gas out of the region also was running higher than in previous years. These factors combined signaled the likelihood of pipeline takeaway constraints and a price meltdown this fall, including the potential for a second round of production shut-ins.

As we’ve noted in previous blogs, ever since the Northeast supply exceeded regional demand on an annual basis starting in 2015, the region has been heavily dependent on storage and takeaway pipelines’ capacity to balance the surplus gas. By late 2018, after a years-long build-out of pipeline projects, the region finally had enough (or even excess) takeaway capacity. But the fall of 2019 proved that the Northeast has remained susceptible to seasonal supply congestion and takeaway constraints during low demand periods (see Punching Bag Part 1 and Part 2).

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