Waha-to-Henry Hub spread narrows as West Texas, US markets face divergent fortunes

New York — The cash-market spread from Waha to the benchmark Henry Hub is at its narrowest this month since May as the two locations face opposing market forces that could endure into the New Year.

In December, spot supply at Waha has traded at an average $2.39, just 19 cents below Henry Hub's own month-to-date average at $2.58/MMBtu, S&P Global Platts data showed. In Dec. 8 trading, the cash spread on the Intercontinental Exchange narrowed from the prior day's settlement to around 22 cents.

The tightening spread from Waha to Henry Hub comes as easing West Texas production lifts Waha's cash market, just as growing supply length in the broader US market puts pressure on the Henry Hub.

Permian market

In December, gas production in the Permian Basin has averaged just 10.2 Bcf/d and is already down about 400 MMcf/d compared to its November average, Platts Analytics data shows.

During the recent summer months, West Texas production had rebounded from a second-quarter low to over 12 Bcf/d, as wells -- previously curtailed during the March oil-market rout -- were brought back online. As the Permian's inventory of existing well continues to mature amid a sustained slowdown in drilling activity, the basin in now facing a steady decline in output.

With an estimated 176 rigs in the Permian Basin this month, drilling activity currently stands at just a fraction of its 2020 apex when the rig count in West Texas reached 429. While nearly 50 rigs have been returned to the Permian Basin since this summer's record low, the mostly oil-directed drilling activity is unlikely to offer a significant boost to gas production in the near term.

According to recent projections from Platts Analytics, Permian gas production isn't likely to resume its growth trajectory until mid-2021 -- likely lending support to cash prices at Waha in the meantime.

Henry Hub

While easing upstream and midstream supply pressures are helping to lift West Texas gas prices, the burden of mild weather and high storage levels is weighing on the broader US market.

In November, population-weighted temperatures in the US averaged at balmy 53.6 degrees Fahrenheit, or about 3.7 degrees above the prior 10-year average, Platts Analytics data shows.

Last month, US residential-commercial gas demand took a hit from the milder weather, averaging just 28.7 Bcf/d -- its lowest since November 2016. With incremental supply typically consumed for heating available in the market in November, US storage volumes also remained elevated.

On Dec. 3, inventories were estimated at 3.393 Tcf, or 290 Bcf above the prior five-year average for the week ending Nov. 27, data reported by the US Energy Information Administration shows.

With recent supply length continuing to weigh on the US market this December, forwards traders have already begun pricing-in significantly lower benchmark gas prices for 2021. On Dec. 7, the Henry Hub calendar-year 2021 curve settled at just $2.52, with the January to June contract currently pricing in the low- to mid-$2.40s/MMBtu, S&P Global Platts' M2MS data shows.