Waha winter forwards hit 40-month highs as Permian gas production rebound stalls

Denver — Forwards markets are becoming increasingly bullish on winter natural gas prices in West Texas as the recent and precipitous drop in Permian Basin drilling activity begins taking its toll on production.

On Aug. 19, Waha calendar-month forwards for December, January and February settled at $2.66/MMBtu, $2.95/MMBtu and $2.87/MMBtu, respectively – their highest settlement prices in nearly 40 months, S&P Global Platts' most recently published M2MS forwards data shows.

Over the past eight weeks, forwards prices at Waha have marched steadily higher as the recovery in Permian gas production has stumbled.

In August, Permian output is averaging 11.2 Bcf/d, down about 300 MMcf/d compared with its July average, S&P Global Platts Analytics data shows.

After declining to a coronavirus pandemic-induced 18-month low of just 9.1 Bcf/d in May, Permian gas production rebounded sharply to more than 12 Bcf/d in early July as operators across West Texas restored output at previously curtailed wells. As the mothballed production came back online though, rig counts in the Permian continued a downward trend that began in March amid ongoing volatility in commodity prices.

On Aug. 20, the rig count in the Permian was estimated at 128, down from an annual high at nearly 430 in March and its lowest in 11 years, data published by Enverus DrillingInfo shows.

In a further sign of production weakness ahead, the number of wells drilled in the Permian plummeted to just 138 in July, while completions numbered just 98 during the month – the lowest figures on record dating back to late 2013, recent data from the US Energy Information Administration shows.

Demand

A nascent rebound in LNG feedgas demand from export terminals in Texas and neighboring Louisiana in August could help to propel Permian prices even higher this autumn, even as demand from the region's industrial end-users and power generators fails to live up to year-ago levels.

On Aug. 20, feedgas delivery to terminals across Texas and Louisiana jumped to more than 4.2 Bcf/d, its highest level since late June, Platts Analytics data shows.

With significantly fewer cargo cancellations scheduled for September, LNG feedgas demand is expected to continue rising over the coming weeks, alongside global gas prices.

In recent trading, Platts JKM — the benchmark price for spot LNG in Northeast Asia — climbed into the low $4s/MMBtu, or its highest level since January, with stronger netbacks signaling the possibility of even fewer cargo cancellations in October. A recent LNG feedgas forecast published by Platts Analytics predicted demand across Texas and the Southeast hitting a record-high average of more than 8 Bcf/d in October.

Stronger demand from the region's export terminals could be enough to offset lower anticipated consumption from industrial end-users and power generators this autumn.

With industries across Texas and the Gulf Coast continuing to recover from the economic fallout of the pandemic, demand could remain about 100 MMcf/d lower between Sept. 1 and Nov. 30 than in the year-ago period, according to Platts Analytics.

For power generators, the recent and sustained rise in gas prices could trigger gas-to-coal switching in the region over the coming months. In the past two weeks, coal-fired units' market share in ERCOT has climbed to 30% from an average of 26% in the final two weeks of July. Over the same period, gas-fired units' slice in the ERCOT generation stack has declined about 3 percentage points, according to S&P Global Platts data.