Waha cash rally continues as rising production, storage loom large over autumn market

Cash prices at Waha are trading above $1 for their longest stretch in nearly two years, but rising Permian gas production and near-record Texas storage levels could pressure the market by this autumn.

Over the past 12 weeks, the cash market at Waha has averaged $1.42/MMBtu and has consistently traded within a daily range above the $1 threshold. On July 20, spot prices were down about 3 to 4 cents to $1.42/MMBtu, preliminary settlement data from S&P Global Platts showed.

Stronger prices at Waha have accompanied a steep drop in Permian Basin gas production this spring.

In May, output tumbled to an average 10.3 Bcf/d as weak oil prices prompted many West Texas producers to curtail some wells or slow drilling and completions activity. In January, Permian production had reached a monthly record high at 12.8 Bcf/d with multiple daily records at over 13 Bcf that month, S&P Global Platts Analytics data shows.

More recently, West Texas gas production has been on the rebound, rising to over 11.5 Bcf/d this month to date as many operators move to restore previously curtailed output. According to Platts Analytics, production could continue rising to over 12 Bcf/d this summer before easing modestly by fourth quarter.

Even flat to modestly higher gas production in the Permian, though, raises doubts over the sustainability of the current market rally, particularly heading into the lower-demand months of autumn.

Storage

Potentially bringing additional downward pressure to the West Texas gas market, statewide gas inventories in Texas are now estimated at nearly 475 Bcf – just below a new record-high level set at 490 Bcf earlier this month, Platts Analytics data shows.

In Texas and the Southeast, more flexible storage capacity in the region's salt domes allows for some mid-summer withdrawals. From mid-June to early September, both regions have historically seen at least modest declines to inventory levels to help meet peak summer demand.

As peak summer demand waning by October, Platts Analytics expects Texas gas storage to could approach record levels again, potentially limiting injection demand during the autumn months.

Market outlook

At Waha, balance 2020 forwards are currently trading at an average $1.63/MMBtu. October is expected to see the weakest calendar-month market, priced at just $1.34/MMBtu, S&P Global Platts' most recently published M2MS forwards data shows.

With Permian producers capped on significant midstream capacity growth prior to the startup of Kinder Morgan's 2 Bcf/d Permian Highway Pipeline in first-quarter 2021, growing supply from strong West Texas production, bloated storage inventories and weak shoulder-season demand could put significant downward pressure on the market later this year.

On July 20, though, revised flow data from Mexican midstream operator, Fermaca, showed a sizeable jump in utilization on one of its key import pipeline networks – a sign that incremental downstream demand from Mexico could come online soon. According to Platts Analytics, the operator's mechanically complete Wahalajara system could boost exports of Permian Basin gas by some 400 MMcf/d.

The startup of commercial operations on the pipeline is reportedly awaiting the outcome of a negotiation between Fermaca and Mexican grid operator, Cenagas, in a deal that will determine which party controls daily operations of the pipeline network.