Viewpoint: Rising Appalachian gas weighs on 2021 prices

Natural gas output from the US Appalachian region has proven resilient this year, even as a price slump forced producers to rein in production growth, a trend that could lead to lower prices in the coming year.

Gas production from the Appalachian region in 2020 has continued to top year earlier levels, despite the efforts of large regional producers such as EQT, Cabot Oil and Gas and Range Resources to cut costs and return more profits to shareholders. Those companies are facing pressure from investors to stop pursuing seemingly endless production growth.

"There is clearly a need for more discipline from all operators" to achieve higher prices, said EQT chief executive Toby Rice in an October earnings call.

But Appalachian gas output has continued to climb, underscoring gains in drilling efficiencies that have allowed producers to coax more gas from each new well. Producers have also locked prices on future output through hedging programs which leave them less susceptible to low regional spot prices.

"We have seen producers — when pricing gets really bad — curtailing, but by and large, they are a little bit sheltered from some of the most extreme price impacts because of hedging," said Anna Lenzmeier, an energy analyst with BTU Analytics.

Dry natural gas production in the Marcellus and Utica shale fields from January to November averaged 31 Bcf/d (878mn m³/d), 4pc higher than a year earlier, according to data from the US Energy Information Administration (EIA). The Marcellus made up the bulk of that output at 23.3 Bcf/d, 6pc higher than year-earlier levels. The formation also had year-over-year gains above 9pc in every month from July to September.

Prices may still receive a boost in the coming months as demand for US LNG increases and associated gas production falls because of lower oil prices. At the same time, some producers may be looking to take advantage of typical price spikes that accompany winter demand. Cold weather in the week ended 18 December lifted prices as a winter storm blanketed the northeastern US. Demand-area gas prices surged to an average of $7/mmBtu on 17 December, almost triple the price a week earlier.

US gas output was expected to drop to 90.9 Bcf/d this year from an average of 93 Bcf/d in 2019, the EIA said. Output was projected to decline through this winter, reaching 87.1 Bcf/d by April 2021, or 10pc lower than the all-time high reached in December 2019, before beginning to increase, according to the EIA.

Spot prices at the Henry Hub, the benchmark price for US gas, in 2021 will average $3.01/mmBtu, according to an EIA forecast. That is down from a November forecast of $3.14/mmBtu. The EIA also revised its forecast average for January down to $3.10/mmBtu from $3.42/mmBtu in the November forecast because of higher expected storage levels.

By McRae Peavy