Higher NYMEX prices have led to weakened basis, likely because of anticipated production growth.
Cal ’21 Dominion South basis has traded in a high negative correlation with Cal ’21 NYMEX Natural Gas all year. That basis market is behaving like small increases in production would lead to some problems with outbound capacity.
DomS Cal ’21 basis reached its recent high near a -$0.40/MMBtu discount to Henry Hub when the NYMEX Cal ’21 gas strip dipped into the $2.30’s. But, as NG rose over $2.70, DomS gave up over a dime, bouncing off its weakest level of the year at -$0.52.
The DomS basis market can become weaker if there is a threat of too much production. Local gas in Appalachia serves local demand, but it must find an exit (or go into storage) if there is too much excess gas.
If this pattern between DomS and NG continues, dips in NG price could be good opportunities to add basis hedges.
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