Forward basis at Dominion South could face upside risk in the months ahead as elevated injection demand and higher year-on-year takeaway capacity tighten Appalachia's summer market balance.
For the April to October calendar months, Dominion South basis is currently pricing at more than an 80 cent/MMBtu discount to the benchmark Henry Hub, or its lowest since the 2017 summer season, S&P Global Platts' most recently published forwards data shows.Lower forward basis valuations for this summer likely reflect concern over Appalachia's recent production strength and an anticipated year-on-year decline in power burn demand.
Month to date, total output from the Marcellus and Utica shales is up about 900 MMcf/d compared March 2020, S&P Global Platts Analytics data shows. This year's production gain could also meet with lower demand by later this summer as generators in the Northeast respond to higher cash prices by dialing back power-burn demand.
But traders anticipating a market surplus and corresponding basis-price weakness this summer could be in for a surprise–particularly during the early months of the approaching injection season.
Storage, takeaway capacityFollowing this February's record-cold Polar Vortex weather, Northeast gas storage inventories are down sharply, potentially driving stronger early-season injection demand and higher gas prices.
Higher heating demand this winter, both in the Northeast and from neighboring destination markets, has dropped inventories to an estimated 337 Bcf as of March 22. That's about 36 Bcf below the prior five-year average and over 120 Bcf below year-ago levels, Platts Analytics data shows.
Assuming cash basis in Appalachia remains near its current, historically low level, gas shippers and utilities across the Northeast could move quickly to bridge this season's storage deficit.
Large injections of comparatively cheap gas in April, May and June might put Appalachia's market balance under unexpected pressure, potentially exacerbated by a year-on-year increase in production-takeaway capacity on Texas Eastern Transmission.
In early May 2020, Texas Eastern–a critical transmission corridor from Appalachia to the Southeast–was crippled by an explosion that kept over half of the pipe's capacity offline last summer. This summer, though, the pipeline is expected to run its full, 2.1 Bcf/d capacity, more than doubling last year's average capacity of just 900 MMcf/d from April to October.
Combined, stronger storage demand and higher takeaway capacity from Appalachia this summer should be sufficient to absorb any potential surplus in the regional market this year. According to Platts Analytics, it could also be enough to lift basis prices significantly from current levels–particularly in the early months of injection season.
