Waha winter basis prices tumble as Permian freeze-off concern thaws

Gas traders are resetting the outlook for basis prices in West Texas as production in the Permian Basin stages a stunning rebound from a deep freeze-off earlier this month. Milder weather forecasts for the region are adding momentum to the market's recent and decidedly bearish revaluation.

Since the start of February, cash basis at Waha has tumbled. On Feb. 9, the West Texas hub was trading around 45 cent behind Henry Hub – down from a more-than-80 cents premium earlier this month.

Balance-of-month basis prices are down even more sharply, tumbling about $2.30/MMBtu to settle most recently at 50 cents discount to the benchmark, Platts' M2Ms forwards data shows.

Throughout the fourth quarter and even into the new year, both January and February forward basis prices at Waha traded at consistent and occasionally steep premiums to the benchmark amid lingering concern over the potential for a repeat of last winter's historic freeze-off in the Permian.

Just since the start of this month, though, the possibility of another hit to Permian production this winter – equal in magnitude to last February's historic cut – now looks increasingly unlikely.

Production, weather

On Feb. 9, early estimates showed Permian gas production at a record 14.1 Bcf/d, according to data from Platts Analytics. While potentially subject to later revision, the surprisingly quick rebound in in West Texas output to record, or even near-record, levels has likely helped to ease market concern over the possible duration and severity of any future weather-related supply cuts there.

In early January, and again earlier this month, freezing temperatures in West Texas were responsible for steep, although relatively short-lived, declines in Permian Basin gas production.

On Feb. 3, Permian output briefly dropped to just 11.9 Bcf/d as low temperatures in nearby Midland, Texas, fell to just 7 degrees Fahrenheit. On Jan. 2, temperatures around 14 degrees there cut Permian production to about 12.3 Bcf/d, Platts Analytics data shows.

Updated weather forecasts for Midland, Texas predict nighttime temperatures there will hover in the mid-30s over the next week with lows not expected to dip under 25 degrees. In the week following, low temperatures are forecast to warm into the upper-30s to low-40s.

Historically, freezing weather in West Texas is much less common in March, making it unlikely that the Permian would see further supply disruptions during remaining days of this winter.

Outlook

Recent downward pressure on Waha's balance-of-winter basis market is reflective of a longer-term trend for 2022 and beyond. Since at least last summer, the 2022 forward curve has been under steady downward pressure amid mounting concern over the Permian's capacity to absorb more production growth.

This year alone, S&P Global Platts Analytics expects production there to grow by over 1 Bcf/d, with total output there potentially surpassing 15 Bcf/d by the fourth quarter.

Recent upstream activity appears to bolster the bullish growth forecast. In the week ended Feb. 2, the number of drilling rigs in the Permian edged up to 309 – a pandemic era high not seen since early April 2020, updated data published by Enverus shows.