East Texas winter gas forward basis tumbles as Permian output, drilling accelerate

Recent growth in Permian Basin gas production appears to be keeping downward pressure on the East Texas market, helping to reset the outlook for balance-of-winter gas prices at key Gulf Coast area hubs.

In recent trading, cash basis at locations like Houston Ship Channel, Katy Hub and Transco Zone 1 have fallen to a more-than-40 cents discount to the Henry Hub, down from year-ago levels at just 4 to 5 cents behind the benchmark, S&P Global Platts data shows.

While the trend isn't new, steeper discounts in East Texas are now becoming more frequent.

After trading at less than 10 cents discount to the Henry Hub for much of this past summer, East Texas gas prices came under increased pressure this fall. From Oct. 1 to date, cash basis at Houston Ship Channel has averaged minus 21 cents. Over the same period last year, the East Texas hub traded more than 25 cents higher, or about 5 cents premium to the US benchmark.

Faltering prices in the spot market are now quickly reshaping the outlook for this winter.

On Jan. 3, the Houston Ship Channel balance-of-month contract settled at just a penny premium to Henry Hub. Just days prior, the full calendar-month January 2022 contract expired at more than 60 cents premium to the benchmark. Over the same one-week period, the February 2022 contract also lost almost 30 cents, settling Jan. 3 at just 14 cents premium to Henry Hub.

From October to late December, both winter contracts traded at nearly 40 cents premium to Henry Hub – likely in anticipation of strong winter-season demand for LNG exports from the Texas Gulf Coast.

Production

Weakening basis prices in the East Texas market come amid rising production in the Permian Basin.

Modeled data from S&P Global Platts Analytics suggest that the uptick in output is likely pushing more supply eastbound on major intrastate transport corridors like Kinder Morgan's Gulf Coast Express and Permian Highway Pipelines and the more recent, Whistler Pipeline.

Twice last month, Permian gas production was estimated at over 14 Bcf/d, falling just shy of its prior record high at 14.1 Bcf/d in June 2021, Platts Analytics data shows.

This year's pre-winter production push in the Permian, which is not atypical for West Texas or other US shale basins, was further fueled by a recent acceleration in drilling and completion activity there.

Since the start of the fourth quarter, Permian operators have added some 34 rigs to the basin, bringing the total to an estimated 300 in the week ended Dec. 29, data published by Enverus shows.

Drillers are wasting no time putting recently added rigs to work. In November, the number of wells drilled surged to a 19-month high at 300. From August to November, well completions averaged over 400 per month – also the highest since first-quarter 2020, data from the US Energy Information Administration shows.

As the upstream activity continues, the outlook for production growth has become increasingly bullish. According to a recent forecast from Platts Analytics, output from the Permian is likely to hit sustained levels at over 14 Bcf/d by sometime in the first-quarter 2022.