Permian winter basis prices tumble amid shifting gas production, demand outlooks

Winter forward basis at Waha is down sharply since the start of November amid a recent acceleration in Permian Basin production and drilling activity that comes just as the outlook for US seasonal heating demand begins to cool.

In recent trading, the shifting supply and demand considerations have prompted a stunning selloff along Waha's forward curve with basis prices for December, January and February falling more than 30 cents.

After reaching a 20 cents premium to the Henry Hub earlier this month, Waha's December contract has dipped into negative territory recently, settling Nov. 22 at a 16 cents discount to the benchmark.

Both the January and February contracts have seen similar declines, falling from over 40 cents premium to Henry Hub in early November to less than 10 cents premium currently, S&P Global Platts' most recent M2MS data published Nov. 22 shows.

Supply

Cooling expectations for Waha winter gas prices come as output from the Permian tests prior record highs this month. In the first week of November, estimated production twice topped 13.9 Bcf/d, falling just shy of the basin's June 2021 record at 14 Bcf/d, S&P Global Platts Analytics data shows.

Analytics forecasts calling for steady growth in the Permian into 2022 and beyond now looking increasingly convincing.

With cash and forward gas prices near historic highs, drilling incentives in the Permian Basin are only growing. In a recently published internal rate of return or IRR analysis, Platts Analytics estimated half-cycle, post-tax returns in the Delaware Basin at nearly 60% with the Midland Basin estimated in the upper 40% range. Returns for both sub-basins are up sharply from year-ago levels.

Permian producers have already begun responding to the uptick. In the week ended Nov. 17, rig count in West Texas surged to 284 marking its highest since mid-April 2020, data published by Enverus shows.

Demand

The improving outlook for Permian supply growth comes just as expectations for US winter 2021-22 heating demand have begun to cool, likely in response to more definitive – and less-than-bullish – seasonal weather forecasts.

In an updated three-month outlook published Nov. 18, the US National Weather Service predicted that a broad swath of states stretching from the desert Southwest and Texas to the Gulf Coast, Southeast and East Coast would see at least a 40% to 50% risk for above-average temperatures from December to February.

Critically, the outlook also predicted more mild winter weather in two US regions that comprise the substantial majority of overall heating demand – the Northeast and the Midwest.

Warmer weather this winter, even in regions not directly connected to Permian supply, could weaken overall demand for West Texas gas. Milder weather, even in the Northeast, could leave more Appalachian supply available to meet feedgas demand from a potentially record season for Gulf Coast LNG exports.