ANALYSIS: Permian winter 2020-21 market bulls defy autumn-season volatility in Waha cash trade

New York — As spot gas markets in the Permian Basin struggle to gain a foothold above $1 this month, forwards traders appear confident that winter prices there will likely climb to their highest in years.

October to date, cash prices at Waha have averaged just 29 cents/MMBtu as pipeline maintenance and weaker shoulder-season demand keep downward pressure on the West Texas gas market.

In Oct. 16 trading, Waha cash prices were down sharply, tumbling 33 cents into negative territory as the market experimented with lows not seen since April. At mid-session, the West Texas benchmark was trading around minus 25 cents/MMBtu, preliminary settlement data from S&P Global Platts showed.

In the forward market, meanwhile, winter 2020-21 gas prices continue to trade at multiyear highs. On Oct. 15, the December-January-February strip settled at an average $2.98/MMBtu, less than 10 cents below a late-September high, S&P Global Platts' most recently published M2MS data shows.

Cash volatility

Volatility in the Permian cash market recently comes amid a series of October maintenances on El Paso Natural Gas, which have limited producers' access to neighboring demand markets this month.

On Oct. 14, El Paso began another set of maintenances, scheduled to last through the end of this month, that are currently restricting westbound capacity on the pipe's mainline by an estimated 540 MMcf/d.

In addition to the maintenances, shoulder-season demand weakness is also putting pressure on prices.

On Oct. 16, the sharp downward price movement at Waha came as the market anticipated a steep drop in gas demand from southern California. After a multiday heatwave pushed Los Angeles temperatures into the mid-to-high 90s Fahrenheit, highs in the metro-area were expected to fall into the 80s F from Oct. 17 to Oct. 19, according to a National Weather Service forecast.

In end-user markets across the Southeast, also a key destination for Permian supply, gas-fired power burn demand was also forecast to fall by some 700 MMcf/d from Oct. 17 to Oct. 19, according to a forecast from S&P Global Platts Analytics.

Winter bullishness

For the balance of October, forwards markets remain pessimistic about the odds of a major market-turnaround at Waha. On Oct. 16, the balmo contract was priced at just 14 cents/MMBtu.

For November, the market looks less bearish with calendar-month prices averaging about $1.14/MMBtu month to date. By. December, though, forwards traders are anticipating a significantly tighter market balance, with the calendar-month contract most recently assessed at $2.60/MMBtu.

Prices for January and February are even higher, with both contracts most recently settled at $3.17/MMBtu, S&P Global Platts data shows.

The bullish outlook for this winter comes, largely, as a result of the enduring slowdown in Permian Basin drilling and production this year. In October, gas production from the West Texas shale basin has averaged just 11 Bcf/d – down nearly 14% from a record-high average at 12.7 Bcf/d in March.

With rig count in the Permian currently hovering around 140, or about 15 rigs above a recent record low, Platts Analytics has forecast production to remain at or modestly below its current level through at least mid-2021.