Today’s report (week ended 2 Nov): EIA: +65 bcf, EA: +56 bcf
- Today’s release came in nearly 1 bcf/d above consensus estimates, hinting at somewhat higher production than originally estimated. However, some of this miss may have stemmed from the choppiness of res-com demand as GWHDDs ramp up seasonally.
Next Thursday’s report (week ending 9 Nov): EA preliminary: +43 bcf
- The week in progress shows a near 12% w/w uptick in GWHDDs, which corresponds to a 2.6 bcf/d w/w rise in res-com demand. That early heating spike is being largely offset by a 1.5 bcf/d w/w decrease in power. Our daily power burn model for the last three days came in 4 bcf/d lower than the level projected at the end of last week, before prices jumped. That is more than our estimated sensitivity of roughly 2 bcf/d per $0.50, but short-term switching dynamics can exaggerate price impacts.
Appalachia trailing off
North American gas markets were upended early this week, as prices shot up on forecasts for significantly colder weather in the weeks ending 16 and 23 November. Forecasts for heating degree days jumped by 30% d/d for those weeks based on overnight revisions on 5 November. Our projection for end-November inventories was shaved by 100 bcf, to 3.06 tcf, from last Thursday’s estimate released in conjunction with Panorama. One factor we have highlighted given the precarious end-October storage carryout of 3.2 tcf (-0.58 tcf y/y) is the likelihood that concurrent cold weather in the Northeast and South Central could overwhelm both current inventories and gas production in Appalachia that is serving as ‘latent storage’ (see E-mail alert: More severe cash price spikes above 2017-18 peak this winter, despite production growth, 17 October 2018). The looming spectre of such an event has driven cash prices to a 10-month high of $3.51/mmbtu, although we do not anticipate deliverability issues this month given current weather forecasts for cold, but not severely cold temperatures (see E-mail alert: Baby it's (gonna) be cold outside, 6 November 2018).
Appalachia output will serve as a major component of the ‘latent storage’ that the Northeast will lean on to mitigate massive withdrawals, yet receipts in the region have remained below 30.0 bcf/d in early November. October output of 29.5 bcf/d was down by 0.2 bcf/d m/m, though Appalachia crossed the 30.0 bcf/d threshold on 27–28 October, giving hope that new infrastructure would push production higher in the heating season. That has not transpired in November to date, with Appalachia output averaging just 29.3 bcf/d.
New pipeline projects have come online to help alleviate Appalachia constraints, but they have not yet provided noticeable uplift. The Central Penn line of Atlantic Sunrise continues to flow 0.8 bcf/d after entering service on 6 October. NEXUS, which entered partial service on 13 October, saw flows jump by 0.4 bcf/d to 0.7 bcf/d after starting-up its Clyde compressor on 3 November. Rover flows also jumped this week after Rover started up its final two laterals, Sherwood and CGT. Most of the boost was capacity booked by Antero Resources on Sherwood. Despite all this new capacity, the gas in these projects seems to be mostly redirected from other pipes rather than new production, as evidenced by the stubborn lack of movement from Appalachia output.
Our forecast shows Appalachia growth slowing through the heating season as various factors conspire to depress regional gains to just 3.4 bcf/d y/y thus far in November. Several producers, including EQT and Cabot Oil & Gas, have lowered Q4 18 guidance in the most recent round of earnings, citing the need for more efficient expenditure. The heating season could see weather-related supply disruptions in the form of freeze-offs if frigid temperatures materialise. During the heating season, producers can compete for space on pipes, with utilities shipping gas for winter heating. Cabot mentioned in their Q2 earnings call that early cold would also increase pressure in the pipes and reduce what a pipe can accept in total volume.
Future infrastructure development in Appalachia continues to fall behind schedule, as a mixture of slow construction and legal challenges stymies key projects. The Western facilities of WB XPress were approved on 11 October, but the project is still waiting for FERC authorisation for its Eastern section before it begins meaningful flows. The next major addition is scheduled to be TransCanada’s 2.7 bcf/d Mountaineer XPress, which will flow gas from West Virginia south towards the Gulf Coast. Construction plodded along for much of the summer and early fall, yet TransCanada reported progress in its last FERC filing, which covered activity through 20 October. Over 70% of the pipe is now back-filled, up from 55% previously.
However, the most relevant number in the filing may have been that Mountaineer has completed just 15% of restoration. This is an improvement on the 8% of remediation finished in late September. However, FERC has set a precedent that nearly 70% of restoration work should be finished (with a clear schedule for the remaining work) before a pipeline receives authorisation to operate. This was the threshold that both Atlantic Sunrise and NEXUS had to meet for their October approvals (see E-mail alert: Weekly basis update: Appalachia infrastructure boon from Atlantic Sunrise and NEXUS likely to lift Leidy and can hurt M3 basis, 12 October 2018), which Mountaineer is unlikely to hit before the end of the year. While TransCanada maintained a 2018 start-up for Mountaineer in its recent earnings filing, the significant amount of restoration still to be completed leaves our forecast for the project to slip into 2019 unchanged.
Meanwhile, EQT has once again delayed projected completion of its 2.0 bcf/d Mountain Valley Pipeline (MVP), from Q3 19 to Q4 19 (from an original Q4 18 scheduled in-service date). The most recent delay comes as MVP lost a third water crossing permit, this time as the Army Corps of Engineers revoked authorisation for work on waterways in Wetzel and Harrison Counties, WV. The Corps revoked the permit after an early October decision by the US Court of Appeals for the Fourth Circuit to suspend a similar permit further south in Jackson County, WV. While EQT has won previous legal battles against environment advocacy groups, the result has been delays and ballooning budgets (see E-mail alert: Mountain Valley gas pipe construction hindered due to lawsuits and erosion control issues, 13 June 2018). The return of a dozen tree-sitters (protestors living in raised platforms attached to trees), which has prevented MVP from clearing its full right-of-way near Elliston, VA, is also complicating construction efforts.
Cash prices above $3.50 this week—the highest since the end of last January’s spike and the highest November prices since 2014—highlight the gas-to-coal switching economics in play this winter, which could find even higher levels in 2019. Data this week also confirm that a $0.25/mmbtu move in gas prices can have a dramatic impact on gas burn. Despite today’s looser-than-anticipated EIA storage print, fundamentals look tight for the next several weeks on the cold, with the week ending 16 November now showing the season’s first triple-digit withdrawal. The market has not had a triple-digit November withdrawal since the 2014 polar vortex, though that withdrawal was much higher.
As we have stated before, the market will continue to move in sympathy with weather forecasts. However, as the overall inventory level is expected on current forecasts to get shaved so early in the heating season— 100 bcf is knocked off our estimates on early cold alone—realised cash prices this winter should see a higher central tendency, barring a mild event later in the season.
|Fig 1: Total Appalachia production m/m, bcf/d||Fig 2: Percentage change in HDD count between 2018 and 10-year normal|
|Source: EIA, Ventyx, Energy Aspects||Source: Weatherbell, Energy Aspects|