ANALYSIS: Appalachia Q1 forwards spike as Polar Vortex threatens production freeze-offs

New York — Warnings from meteorologists about the potential for polar vortex weather to develop in the central and eastern US later this month are fueling a rally in Appalachia's balance-of-winter gas market, where wellhead freeze-offs could pose a significant and prolonged risk to upstream supply in the region.

Since late December, first-quarter forwards prices at Appalachian benchmark Dominion South have surged to their highest since mid-November, gaining nearly 30%, or about 50 cents, to settle at an average $2.27/MMBtu on Jan. 7, S&P Global Platts' most recently published forwards data shows.

In the Northeast market area, where production freeze-offs pose a lower immediate risk to supply, the rise in prices has been more muted. At Transco Zone 6 New York, the first quarter forward-price average has climbed about 11% since late December; at Algonquin the curve is up just 8%.

Recent forecasts from the Weather Company, AccuWeather and others suggest that the polar vortex – which typically remains centered over the North Pole – could move southward soon, bringing snow and frigid cold temperatures to the US Midwest and East Coast by late January and potentially into February.

Historically, temperatures in the single digits Fahrenheit across Appalachia's production area have caused widespread wellhead freeze-offs, crippling supply for weeks and pushing prices to annual highs.

Winter 2018-2019

Appalachia's most recent encounter with record-cold weather came in January 2019 when average temperatures across the region plunged twice into the single digits Fahrenheit over a 10-day period.

As temperatures in nearby Pittsburgh plunged to just 6 degrees, production in Appalachia fell 1.5 Bcf/d, or nearly 5%, to 29.5 Bcf/d. Following a brief reprieve when temperatures climbed into the 20s Fahrenheit, the region again turned colder as Pittsburgh temperatures plummeted to just 2 degrees.

After retreating further to 28.5 Bcf/d, Appalachian production struggled to recover through February 2019, averaging only 30 Bcf/d that month – about 1 Bcf/d, or 3%, below its pre-freeze off level.

In the cash market, meanwhile, Dominion South prices spiked in response to the supply cut, climbing into the low-$3s/MMBtu and remaining elevated through late January of that year.

Supply outlook

Following record price volatility this autumn, Appalachia's producers appear to have fully restored prior wellhead curtailments and have pushed output toward record highs as they look to benefit from a stronger cash market.

With Dominion South prices hovering in the low-$2/MMBtu area, regional production has been remarkably stable over the past month in the upper 33 Bcf/d area.

While this winter's more bullish market conditions could be expected to keep production levels stable, freeze-offs, potentially caused by Polar Vortex conditions, could cause significant and sustained declines in output of 1 Bcf/d or more.