Constraints to the north and to the west have combined to clobber West Texas spot prices this week, including a new all-time low at the Waha hub, and analysts see more volatility on the way as Permian Basin producers wait on additional takeaway capacity.
Day-ahead prices plummeted in West Texas Wednesday, as Waha collapsed $1.06 to average just 61 cents/MMBtu on the day. Other regional points also got crushed but not to the same extent, with El Paso Permian tumbling 56 cents to $1.17.
The West Texas spot price doldrums continued Thursday. Waha bounced back from Wednesday’s all-time low, but on average trades couldn’t climb above the $1.00 mark, ending the day 35 cents higher at 95 cents. El Paso Permian, meanwhile, fell another 21 cents to average just 96 cents on the day.
Wednesday’s average price at Waha easily undercuts the lowest trade on record at the point going back to 1995, a low of 95 cents reported in December 1998, NGI historical data show.
Waha finished a whopping $2.45 cents back of Henry Hub on Wednesday. That’s not the widest negative basis differential on record for Waha because of higher price levels at Henry Hub in the 1990s and early 2000s. However, since 2015 after the collapse in oil prices and the massive focus on the Permian Basin because of its best-in-class breakevens, the region’s basis differentials have seen a sharp downward trend.
The takeaway constraints driving depressed pricing for the Permian have been well documented, and on a good day these constraints have seen West Texas points routinely trade more than $1 back of Henry Hub. It’s against this backdrop that news of additional downstream restrictions this week compounded the problems for Permian producers.
“It’s no secret by now that” that gas takeaway pipelines out of the Permian “have been running near full the last few months, jam-packed like Southern California traffic while trying to whisk away copious volumes of mostly associated natural gas to markets north, south, west and east of the basin,” RBN Energy LLC analyst Jason Ferguson told clients Thursday.
“Despite every major artery running near capacity this summer, Permian prices had so far managed to avoid falling below the dreaded $1.00/MMBtu threshold, a precipice that historically defines a gas producing region as definitively oversupplied. That all changed” on Wednesday “as word came in that Southern California Gas Co. (SoCalGas), one of the largest recipients of Permian gas, has nearly filled its gas storage caverns and will soon need far less gas hitting its borders.”
This is particularly bad news for Permian producers, according to Ferguson, who said the basin has limited options for reducing flows attempting to move west out of the region.
The constraints to the west also coincided with forces majeure this week on Kinder Morgan Inc.’s NGPL system restricting flows downstream of the basin in the Midcontinent and Midwest, Ferguson noted.
“The SoCalGas and Kinder Morgan announcements combined to create an extremely chaotic day of trading” at the Waha hub, “where prices were already under pressure,” the analyst said. “...Given the speed and severity of Wednesday’s price movements, we expect the Permian gas market to remain volatile in the days ahead as production remains healthy and demand is falling seasonally.”
More weather-driven demand could help ease constraints, but that likely won’t be a “significant factor” for another two months or so, Ferguson said.
“A combination of production curtailments or flaring may play a role now that we have reached levels where some producers may not find it profitable to produce gas into a pipeline,” according to Ferguson. “...A few small brownfield expansions could also help alleviate some of the takeaway constraints,” such as the Enterprise Products Partners LP and Energy Transfer Partners LP joint venture to resume service on the Old Ocean pipeline.
“However, in our view, it is likely that we’ll see an increasing frequency of days” mirroring Wednesday until Kinder Morgan’s Gulf Coast Express Pipeline Project enters service.
Genscape Inc. analyst Joseph Bernardi painted a similar picture of the Permian’s recent pricing woes, pointing to various coinciding constraints inside and outside the basin that could be putting the squeeze on producers.
“Reported production numbers within the Permian have been unusually volatile over the last three days, particularly on” El Paso Natural Gas (EPNG), Bernardi said Thursday. “One possible contributor is maintenance at EPNG’s ‘KEYST ST’ meter, affecting flows out of the Keystone Hub, which began on Tuesday and has led to numerous re-routes within the Permian to accommodate the reduced operating capacity.”
Bernardi said maintenance was expected to extend through Friday’s gas day, noting that production receipts initially dropped consistent with the Keystone restriction before rebounding in later cycles Tuesday and Wednesday.
Typically maintenance at the Keystone point “does not correspond with noteworthy Waha price movements, indicating that there may be other factors influencing” the record low spot prices this week, according to the analyst. “Another contributor to Waha prices from outside the region could be lowered demand in the Desert Southwest resulting from mild weather. EPNG demand has shown the largest decreases, posting a new month-to-date demand low for Wednesday’s gas day.”
SoCal Border Average spot prices fell Wednesday, possibly related to “the additional flexibility for receipt capacity at the California/Arizona border that became available at Topock. EPNG’s deliveries to SoCal at Ehrenberg have dropped precipitously, by over 300 MMcf/d, as a result of unplanned maintenance on” the Southern Zone for imports into the SoCalGas system.