ANALYSIS: Texas Gulf Coast price premiums to endure as gas exports tighten regional market balance

Surging natural gas export demand from Mexico and from the Gulf Coast LNG terminals is tightening the supply balance in East and South Texas recently as it promises to convert the region into a premium basis market.

In April, exports to Mexico are averaging their highest level on record at over 6.1 Bcf/d. Feedgas deliveries to terminals in Texas and Louisiana, meanwhile, are setting their own record high this month, averaging over 10.5 Bcf/d.

As overseas demand for Gulf Coast supply surges, basis prices in East and South Texas have staged a sharp turnaround this month, rising from steep discounts to the Henry Hub in March.

At Houston Ship Channel and Katy Hub, cash basis is up 21 cents and 16 cents, respectively, this month compared with last, with both locations now trading at premiums to the US benchmark. In South Texas, basis prices at Texas Eastern STX and NGPL STX have made smaller gains of about 8 cents each -- still rising from discounted territory last month to now modest premiums, S&P Global Platts data shows.

While the Texas Gulf Coast has often traded up to modest price premiums to Henry Hub, those periods have often been short-lived. This time, though, it appears that the market is pricing in basis premiums over the longer term as it braces for a more enduring change to the region's supply-demand balance.

Exports

In mid-April US pipeline exports to Mexico surged to a single-day high at nearly 7 Bcf/d amid unseasonably warm weather and a corresponding jump in electric cooling demand south of the border.

With more US-shipped supply now capable of reaching end-users in Mexico than ever before, recent cross-border and downstream capacity expansions are promising more records this summer. Through the peak-demand months of June, July and August, pipeline exports from the US to its southern neighbor could average as high as 6.5 Bcf/d, according to a recent forecast from S&P Global Platts Analytics.

As export demand in Mexico grows, its supply impact along the Texas Gulf Coast will only be further magnified by the region's burgeoning LNG export prowess. In April, feedgas deliveries to terminals in Louisiana and Texas are already at record highs as capacity utilization at Cameron LNG and Freeport LNG continues ramping up.

With Northeast Asia's summer-season LNG import prices trading at over $8/MMBtu, strong netback margins from the Gulf Coast should keep the region's export terminals operating at or near full tilt over the coming months.

Forward curves

With overseas export demand growing, East Texas gas traders are pushing forwards prices higher at hubs like at Houston Ship Channel and Katy, where supply is expected to continuing tightening.

At both locations, summer basis is pricing as high as 13 cents over Henry Hub for July and August. For the peak-winter demand month of January 2022, the two hubs are priced at a 22 cent premium.

In South Texas, hub prices are mixed, but still above historical averages. At NGPL STX, the forward curve is pricing at similar levels to East Texas. At Texas Eastern STX, basis is pricing at a high of 11 cents this summer and a high of just 13 cents for January 2020, S&P Global Platts' most recently published M2MS data showed.