Appalachian Basin gas production tilts downward as basis differentials widen

The arrival of shoulder season in the US Northeast appears to be weighing on gas production in the Appalachian Basin this month as regional producers respond to falling demand and high storage levels.

In April, output from the Marcellus and Utica shales has pulled back to an average of 34.3 Bcf/d to trend at its lowest since February when a deep freeze across the eastern US slashed production from the Appalachian Basin, data from S&P Global Commodity Insights shows.

The downward drift for gas production this month has been far from widespread. Sample production data appears to show a concentrated decline in output from Ohio and southern Pennsylvania—potentially given the region's exposure to recent price volatility at Eastern Gas South.

In Ohio, production receipts averaged about 5.9 Bcf/d in April, down from a first-quarter average of just under 6.3 Bcf/d. In the southern Pennsylvania dry window, the magnitude of the recent decline is similar with output dropping to an average of 5.5 Bcf/d this month from about 5.9 Bcf/d in Q1.

The decline in Appalachian production this month may come as no surprise to many market observers. As heating demand across the Northeast fades, so too does the region's appetite for Appalachian gas. With long-haul interstate pipelines to Midwest and the Gulf Coast gas markets continuing to flow near capacity, some producers could be opting to shut in output in lieu of selling on the cheap at Eastern Gas South.

Demand, prices

Not surprisingly, gas demand across the Northeast has fallen sharply in April as more spring-like weather arrives in the region. Month to date, total demand has averaged about 19 Bcf/d—down from an average of 24.8 Bcf/d in March, and levels around 26-27 Bcf/d in January and February, S&P Global data shows.

Falling demand is already putting pressure on upstream prices. At Eastern Gas South, cash prices have fallen to an average 51-cent discount to the Henry Hub in April—down from a 24-cent discount in March and a 38-cent discount in February. With broader supply pressure already weighing on the benchmark Henry Hub this spring, outright cash prices at Eastern Gas have hit alarming lows recently with the market settling as low as $1.27/MMBtu April 14.

In a recent analyst note, lead author Jean Salisbury of Bernstein acknowledged the growing price pressure in Appalachia, citing weaker basis prices seen during the 2022 spring and fall shoulder seasons compared with differentials recorded in 2018. Notably, her analysis also identifies an outright cash price at which producers appear more willing to dial back output.

"Appalachia historically produces down to a cash cost threshold of [about] $1.25/Mcf; over sustained periods this appears to be the local floor," Salisbury writes. Based on recent price and production trends in Appalachia, it appears that Salisbury and her Bernstein colleagues are on to something.

Storage

Storage injection demand this spring could temporarily offset some of the emerging pressure on Appalachian production and prices. Considering the region's already high inventory levels, though, using storage demand as a crutch this spring could amount to a vein effort that simply delays price pain to the fall months.

On April 20, the US Energy Information Administration's latest gas storage report estimated inventory levels in the East region at 363 Bcf—83 Bcf, or nearly 30%, above the five-year average. By some analysts' accounts, East region storage could reach capacity by mid-October or earlier, long before winter heating demand can help to balance Appalachian Basin gas production.