Strong storage withdrawals, as well as the tightening spread at Appalachian gas pricing hubs Dominion South Point (Dom SP) and Columbia Gas (TCO) have not been weather-driven in winter 2016/17. The narrower Dom SP/TCO spread, according to PointLogic Energy, was rather caused by slower than expected production growth, coupled with a rise in take-away capacity from storage due to rising demand for natural gas in the Northeastern United States.
A combination of upward strength at Dominion and a downward trend at TCO tightened the location differential at these two hubs since this past winter – the third warmest winter in the Northeast since 2010.
Starting from December 2016, the spreads between Dominion South and TCO Appalachia started to narrow. “In May last year, the two hubs had exited an extremely bearish winter, and Dominion South cash basis averaged at $0.5/MMBtu, per OPIS Natural Gas Index. TCO’s discount to Henry averaged $0.10/MMBtu, or a 43-$cent spread from Dominion South,” says Point Logic analyst Callie Kolbe.
In 2017, the two fields have exited again from a relatively mild winter. Over the last 16 months, a combination of increased net deliveries of gas to interconnecting pipelines targeting the Midwest and Gulf Coast, flat year-on-year demand and marginal production growth have changed the storage patterns on these two pipelines.
“As a result, this has altered the relationship between the two hubs. Since April, Dominion South has traded at an average of roughly a $0.27/MMBtu discount to TCO Appalachia, narrowing the spread by 16 cents,” Kolbe explains.
From January 2016 to May 2016, Dominion South cash basis averaged $(0.53/MMBtu) below Henry Hub, while TCO traded at a $(0.10) deficit. Since then, PointLogic Energy estimates that Northeast production has only increased by roughly 1 Bcf/d -- growing from 21.8 Bcf/d in 2016 to a current year-to-date average of 22.8 Bcf/d. This is far below a 2.6 Bcf/d increase in production between the same months in 2016 compared to 2015.
Additionally, during the same time frame, Northeast demand softened by 2 Bcf/d from 2016 to 2017 as compared to 2016 over 2015. So while the period this year showed that the Northeast was producing an excess of about 1 Bcf/d of gas, this was actually a stronger performance than the prior year when demand softened by 4 Bcf/d during that time and created an excess of about 1.4 Bcf/d of gas. In short, despite the mild winter, the Northeast experienced a tighter supply and demand balance this year as compared to a year ago.
Looking to the summer season, should we anticipate this tight trading between TCO Appalachia and Dominion South to continue?
The current storage deficit and resulting need to inject is likely supporting the current stronger basis at Dominion South. However, Dominion’s system is more dependent on the expansion of interconnected pipeline systems to find an outlet for gas downstream, while TCO’s system is more interconnected and flexible.
“Given Dominion’s less flexible system, the current price support could dissipate very quickly if mild cooling degree day demand is realized this summer, and if Northeast production continues its recent upward momentum That said, most three-month weather forecasts indicate average or above-average temperatures, which could help keep upward pressure on the Northeastern hubs,” Kolbe said.
Consideration also needs to be given to several pipeline expansion projects, scheduled for this summer, she said, suggesting “these could provide relief to discounted basis values at TCO and Dominion.” This rings true particularly for Energy Transfer Partners’ Rover Phase I and TETCO’s Gulf Market Expansion Phase II, which are expected to enter service in July and August 2017.
“Increased production and the additional outlets to the Midcontinent and Southeast will likely keep the hubs trading closer than in the past,” she added. PointLogic will continue to closely monitor Northeast storage, production and expansions over this summer.