Warmer forecast temperatures pose downside risk to Texas spot gas prices

Near-term forecasts for warmer temperatures in Texas look likely to squash the recent run of higher spot natural gas prices in the state, with gas demand expected to fall while risks of production freeze-offs dwindle.

Already, spot gas prices across the Lone Star State fell in Feb. 28 trading for next-day flows. In East Texas, cash Houston Ship Channel dropped 26 cents to trade at $4.02/MMBtu and Katy Hub similarly shed 25 cents to $4.07/MMBtu, according to preliminary S&P Global Platts settlement data.

West Texas spot gas prices saw an even sharper daily decrease, with preliminary settlement data showing Waha Hub down 48 cents to trade at $3.71/MMBtu.

The average Texas temperature was forecast to steadily rise more than 20 degrees Fahrenheit over the first week of March, reaching nearly 70 F by March 6.

Average daily temperatures in the mid- to upper-50s Fahrenheit are more typical for Texas during late February, according to historical data collected by S&P Global Platts Analytics and CustomWeather.

The warmer temperatures are set to substantially weaken heating demand in Texas over the next seven days, with Platts Analytics expecting residential-commercial demand to be slashed by 1.1 Bcf, or 42%, by March 6 from Feb. 28 levels.

Recent cold snap

The forecast marks a dramatic shift to above-normal temperatures in Texas, following a stretch of dramatically below-normal temperatures during the last week of February.

The state's average temperature plunged into the 30s Fahrenheit Feb. 23-26, more than 20 degrees lower than normal, and remained colder than normal in the 40s F Feb. 27-28.

Residential-commercial gas demand in Texas averaged 2.85 Bcf/d during the last seven days of February, up around 550 MMcf/d from the prior 30-day average, according to Platts Analytics.

Production

Turning to the supply side, warmer temperatures reduce the risk of production freeze-offs, another bearish sign for regional spot gas prices.

West Texas gas production has proven to be particularly vulnerable to sub-freezing temperatures so far this year, with Platts Analytics data showing that Permian gas production dropped during recent cold snaps in January and February.

Even with recent temperature-related dips in production, the Permian Basin saw one of its strongest months on record for natural gas production in February, averaging 13.83 Bcf/d. Signs of further production gains include the basin's Baker Hughes rig count, which was up more than 100 rigs from year-ago levels as of Feb. 25. Buoyant global crude oil prices are another sign, given the associated nature of much of the basin's gas production.

Outlook

Looking ahead, continued warm temperatures in Texas appears likely, according to monthly outlooks from the National Weather Service, Platts Analytics and CustomWeather.

The weather service's 30-day outlook for March showed a 60%-70% chance that temperatures in Texas will be above-normal. An outlook from CustomWeather forecast that the average March temperature in East Texas would be one-to-two degrees above normal and two-to-four degrees above normal in West Texas.