Analysis: Climbing winter demand, lower supply drive up gas prices at Western US hubs

Denver — Early winter demand has arrived in California, dipping into storage fields earlier than normal, and pushing SoCal Gas, city-gate prices above the benchmark Henry Hub as lower production in the Permian Basin looks to likely limit supply to the region during the withdrawal season.

Weaker inflows and stumbling production are expected to drive tighter Western US balances winter over winter, particularly in the US Southwest, despite declining demand as risks to additional production cuts and potentially underperforming imports from Western Canada loom, according to S&P Global Platts Analytics.

Platts Analytics data implies Southwestern production will shrink this winter over last by approximately 438 MMcf/d, slated to average 4.4 Bcf/d. The bulk of the reduction will come from the Permian's Delaware Basin in New Mexico, which is set to lose 370 MMcf/d, or about 12%. Should WTI prices continue to weaken, this could prompt operators in the basin to temporarily shut-in wells similar to what occurred at the height of the ongoing pandemic this past summer, tightening balances beyond current projections.

In addition to regional production declines, a bleak production outlook in the Rockies and West Texas will likely shrink how much supply is able to move toward Southwestern markets. Platts Analytics forecasts show US Southwestern inflows from the Rockies and Texas will decrease winter over winter by approximately 312 MMcf/d and 1.1 Bcf/d, respectively.

Not only will stumbling production play a large role in tightening Southwestern balances this winter, but so could the Permian Highway Pipeline, especially if the pipeline enters service or ramps up months ahead of its estimated in-service date of April 2021. Any incremental competition and pull of Permian supply along this pipeline will likely come at the expense of westbound and northbound flows out of the Permian, unless Southwestern pricing strengthens to retain inflows.

Western Canadian imports into the US Pacific Northwest are forecast to average 3.6 Bcf/d this winter, an increase of approximately 100 MMcf/d over last, partially offsetting the supply shortage in the West. However, imports could be at risk of falling short of Platts Analytics' forecasts. Driving those downside risks include potentially stalling to falling production in Western Canada, as well as stronger-than-anticipated winter demand that could limit exports.

Additionally, Bakken production could come in weaker than anticipated, strengthening the AECO to Chicago spread, further incentivizing incremental utilization of available capacity on the Northern Border Pipeline.

Combined net flows into the Pacific Northwest and the Southwest are forecast to weaken over 1.1 Bcf/d compared with last year, according to Platts Analytics.

On the demand side, power burn demand in the Western US is set to decline approximately 296 MMcf/d winter over winter, with roughly 210 MMcf/d of the decline coming from the Pacific Northwest. Assuming normal winter weather, weaker power burns in the region will be driven by continued buildout of renewable generation capacity eating into gas-fired generation's market share and sustained reliance on hydropower generation.

Lack of enough supply to go around across the West will largely offset weaker demand expectations for this winter, which should bolster regional pricing throughout the withdrawal season.

PG&E Malin basis is forecast to average a 28-cent premium to Henry Hub this winter, an increase of about 9 cents over last year. PG&E city-gate basis is forecast to average $1.17/MMBtu above Hub, a winter over winter increase of approximately 27 cents.

Further south, SoCal Gas, city-gate basis is currently forecast to average $1.59/MMBtu, 11 cents weaker than last winter while El Paso San Juan basis is forecast to average 2 cents this winter, an increase of about 30 cents over last winter.

Taking a closer look at SoCal Gas, city-gate last winter from November through January, the basis averaged $2.55/MMBtu on the back of strong winter demand amid ongoing pressure restrictions along several pipelines within Southern California Gas Co.'s system that fueled bullish prices.