Waha spring-22 gas forwards sink as weather, production, maintenance weigh

Forward basis prices at Waha are coming under pressure recently as updated weather forecasts predict unusually mild temperatures this spring that could leave the Permian Basin gas market awash in supply.

In recent trading, calendar-month prices for April and May 2022 have tumbled to as much as an 80-cent discount to the benchmark Henry Hub, marking their lowest in years, Platts M2MS forward data shows.

In 2022, basis prices for the two spring months have trended closer to a 70-cent discount but dropped precipitously on March 17 after the US National Weather Service published its latest 30-day outlook.

According to the updated forecast, unseasonably mild temperatures are in store for nearly every US region in April, except parts of the northern plains, the Pacific Northwest and northern California.

Texas, and the Permian Basin region in particular, appear to be the epicenter for the forecast temperature deviation next month with as much as an 80% probability for warmer-than-average weather. In key heating regions, including the Northeast and the Midwest – where winter heating demand can sometimes linger into April – above-average temperature probabilities range from about 33% to 50%.

As the winter season winds down, the potential supply impact from milder weather in April has been compounded by recent production strength in the Permian and ongoing pipeline maintenance in the Southwest, which continues to push back on westbound gas transmissions.

Production, maintenance

In March, gas production from the Permian has averaged about 13.8 Bcf/d – just 500 MMcf/d shy of the basin's single-day record high set in February, data from S&P Global Commodity Insights shows.

Recent production strength comes despite a series of setbacks caused by wellhead freeze-offs earlier this winter. After dropping below 12 Bcf/d in early February, output quickly rebounded to a new record high last month propelled in part by recent momentum in upstream activity across the Permian.

As of mid-March, the rig count in the Permian is now estimated at 330, or its highest since early April 2020, recent data published by Enverus shows. Drilling and completion activity has been equally bullish. In February, Permian producers drilled some 343 new wells and completed 429 – both levels largely unseen in the pandemic era, data published by the US Energy Information Administration shows.

As Permian drilling and production accelerate, old and emerging pipeline constraints in and around West Texas are promising to leave more supply constrained near Waha this spring.

In its latest maintenance update, El Paso Natural Gas acknowledged that an ongoing force majeure on its westbound Line 2000 would remain in place through at least March, with no timeframe for a return to service. Westbound capacity from the Permian Basin has been diminished by at least some 400 to 500 MMcf/d since the maintenance began, S&P Global data shows.