A key natural gas trading hub in the Appalachian production region has become largely untethered from the US gas futures benchmark over the past year as increasingly full pipelines have isolated Appalachia from the broader domestic market.
For much of the last year, spot prices at Columbia Gas, Appalachia, a key gas hub in the mammoth Marcellus shale basin of Appalachia, have moved almost entirely independently of the front-month Nymex settlement at the US benchmark Henry Hub in Louisiana, which is the most well-known US gas price. On sessions ended June 2023 through February 2024, the three-month correlation coefficient — an indicator of how closely two data points move together — between the two prices averaged just 8pc, a negligible correlation.
This is a sea change from prior years, when a very high correlation indicated that the same shifts in fundamentals like weather-related demand or production cadence were determining both prices. This relationship has weakened over the past decade, first as innovations in horizontal drilling and hydraulic fracturing, or "fracking," made the Marcellus shale the most productive US gas basin, and then as constraints to expanding pipeline capacity made TC Energy's Columbia Gas Transmission system less responsive to changes in supply and demand.
More recently, the correlation between Columbia Gas and the US benchmark has returned as a dim outlook for US gas prices has forced producers to curtail output, freeing up pipeline capacity and reintroducing some flexibility to a system so oversupplied with gas it has struggled to respond to shifts in demand. But with large producers like EQT beginning to restore production in recent weeks as the oversupplied US gas market begins to balance and prices climb, it is poised to fall apart all over again.
Here comes fracking
Back when Appalachia was a marginal gas producing region, northeast US demand centers had to get most of their gas shipped in from larger producers on and offshore the US Gulf coast. Much of that gas passed through Appalachia, creating a tight relationship between fundamentals driving the US benchmark gas price and spot prices in Appalachia.
From 2009-2013, the three-month correlation coefficient between the front-month Nymex and spot prices at Columbia Gas, Appalachia, was 87pc.
Fracking unlocked massive new reserves in Appalachia that were previously uneconomical to drill. Between January 2009 and January 2014, dry gas production in Appalachia surged from 1.5 Bcf/d (42mn m³/d) to 13.8 Bcf/d, according to the US Energy Information Administration.
As Appalachia became a major producer, the relationship between Columbia Gas, Appalachia, and the benchmark price weakened, but did not break. Between 2014-2020, the correlation averaged 76pc. This made Columbia Gas an outlier among Appalachian hubs like those on Eastern Gas, zone 2 receipts on Texas Eastern and Transco's Leidy Line, all of which largely lost their connection with the futures market in 2014.
The connection with Columbia Gas likely persisted because of its proximity to Gulf coast and midcontinent demand centers, and because its pipelines crisscross over one another in a broad net, further increasing access to end users. In contrast, the Tennessee Gas and Transcontinental pipelines are essentially straight lines from the Gulf to the northeast.
Appalachian production climbed through 2020, when it plateaued at around 35 Bcf/d. Since then, landowners and environmentalists have successfully blocked almost every greenfield pipeline or major expansion project in the region. This has led pipeline operators to ship volumes ever closer to maximum capacity. The result is less flexibility in the market; a cold snap in New England cannot increase the call on Appalachian supplies if the pipelines connecting the regions are already running full. This further isolated Columbia Gas from the US benchmark, pushing the three-month correlation in 2023 to just 36pc.
Getting back together
But that relationship has begun to recover. The three-month correlation ended on sessions since mid-March has been over 50pc. Since mid-May, it has been over 70pc. This is the result of major Appalachian producers like EQT and Chesapeake cutting production on lower prices, according to Connor McLean, senior energy analyst at FactSet.
Declining output has reintroduced flexibility into the regional pipeline system, making prices more responsive to the fundamentals, and thus more in line with the movement of the US benchmark.
Rising output more recently in response to higher prices foreshadows another severing of that connection. And with few developers willing to risk investing in pipeline in Appalachia, an even more isolated basin full of jam-packed pipelines may be the new normal.
"If you think you're going to build another pipeline out there again, you're sorely mistaken," said Jordan Stitzer, director of US gas origination at Uniper. "We're playing ‘hide the molecule,' where can you stuff it, with no end in sight."
