Steeper basis discounts hit Eastern Gas South as Appalachian production climbs

Peak-summer basis prices at Appalachia's benchmark hub Eastern Gas South have fallen to an eight-week low in recent trading as gas production across the region shows signs of upward momentum.

Calendar-month prices for June, July and August 2022 are now trading at roughly $1/MMBtu discount to the Henry Hub, making for the widest spread since late February when a series of production freeze-offs fueled a steep rise in benchmark US gas prices, S&P Global Commodity Insights data shows.

After rallying alongside Henry Hub earlier this spring, prices at Eastern Gas South appeared to dislocate from the US benchmark recently as Henry Hub summer prices tested historic highs at over $8/MMBtu.

Since mid-April, the Eastern Gas South peak-summer strip has widened its discount to Henry Hub by roughly 25 cents, or about 30%, as traders began to doubt the sustainability of $6-$7/MMBtu gas prices in Appalachia this summer.

The widening forward price spread from Eastern Gas to Henry Hub also comes as Appalachian Basin gas production shows modest but steady signs of growth. In April, production across the Marcellus and Utica shales has edged up to an average 33.2 Bcf/d, or its highest since January, S&P Global data shows.

Based on recent upstream activity, production could be expected to continue growing this summer.

Drilling, completions

In March, operators across the Appalachian Basin drilled an estimated 89 new wells, hitting a pandemic-era high not seen since April 2020, data from the US Energy Information Administration shows.

While well completions in March were unchanged at 95, the monthly numbers appear to have plateaued recently at close to prepandemic levels, the Drilling Productivity Report data shows.

In the week ended April 20, the drilling rig count across the Marcellus and Utica shales edged up to 53 and is now just two rigs shy of a 30-month high recorded in March, data published by Enverus shows.

Recent upstream investments could be a bullish indicator for Appalachian gas production this summer – a topic that is likely to be addressed by the region's producers on upcoming first-quarter earnings calls.

According to an updated forecast published by S&P Global, combined output from the Marcellus and Utica could top 34 Bcf/d by later this summer and potentially reach 34.5 Bcf/d by late 2022.