Tight gas gaps ahead of Appalachia pose a risk for summer storage injections

Strong points

Summer-winter spreads just 10-15 cents at Eastern Gas

Strong near-term, near-term demand boosting summer prices

Northeast gas storage 80 billion cubic feet below average in mid-May

Narrowing summer-winter futures price differentials at Appalachian natural gas hubs promise to slow storage injections this season, which could pose a risk to pre-season inventory levels. winter in the region.

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In key upstream locations across the region, peak summer prices have reached all-time highs relative to next winter’s futures valuations. At the regional benchmark, Eastern Gas South, prices for June, July and August are now trading at an average discount of just 10 to 15 cents from contracts for December, January and February next winter. At Texas Eastern M2 receipts, the same seasonal gap has halved over the past four months to around 30 to 35 cents currently, according to data from S&P Global Commodity Insights.

The relatively high summer prices were fueled by strong demand in the spot market and expectations of a continued tightening of short-term supply in the US market as a whole. In spot markets, Appalachian gas prices are now trading in the upper range of $6/MMBtu. Compared to last spring, baseline spreads against Henry Hub are much tighter, with most hubs now only offering 70-80 cents less than the US benchmark.

The tighter spreads come as near-record volumes of Appalachian gas flow past the region to destination markets, primarily in the US Southeast and Midwest. Since the beginning of the month, net outflows from the Northeastern United States have averaged about 14.2 billion cubic feet per day, just 600 million cubic feet per day below average. monthly record recorded last May, according to data from S&P Global.

With spot demand and Appalachian gas prices expected to remain high through the summer months, a shortfall in Northeast region storage construction this summer looks increasingly possible.

Storage, supply

As of mid-May, regional gas storage in the Northeast is estimated at just under 360,100 cu ft, about 80,100 cu ft below the previous five-year average and its lowest level in mid-May. since 2018.

After hitting a low of around 280 billion cubic feet in early April, Northeast gas storage has been slow to fill up this year. Over the past five weeks, utilities and traders have injected an average of 2 billion cubic feet per day into inventory, which is below the five-year average injection rate of about 800 million cubic feet per day. day, according to historical data from S&P Global.

The paltry pace of injections comes as a steady narrowing of summer-winter price differentials in Appalachia has made storage injections increasingly less profitable, particularly for supply stored and sold to Eastern Gas South, where the summer peak to winter peak has spread. is now around 10-15 cents.

Despite current market challenges, Northeast storage injections are actually expected to exceed the previous five-year average this summer by around 450 MMcf/d to 500 MMcf/d for regional stocks to reach typical levels before winter at more than 1 Tcf at the start. November.

Strong gas demand from power consumptions and LNG exports, expected in Appalachian destination gas markets this summer, is just one of the factors likely to keep the spot market tight. Another is the limited producer response to the recent run-up in gasoline prices. In Q1 2022 earnings calls, some of the region’s biggest operators promised to keep production at maintenance levels this year, using free cash flow to pay down debt or return more value to shareholders. .

So far in the second quarter, Appalachian gas production has averaged about 33.3 billion cubic feet per day, an increase of only 180 million cubic feet per day from its level of a year ago, according to data from S&P Global.

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