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Texas natural gas prices drift lower, despite Permian Basin production freeze-offs

Highlights

Waha dips 20 cents, East Texas hubs down over 40 cents

Texas gas production down 1 Bcf/d from Jan. 20 to 21

Statewide demand to drop 2 to 3 Bcf/d over next week

  • Author
  • J Robinson
  • Editor
  • Richard Rubin
  • Commodity
  • LNG Natural Gas

Forecasts calling for warmer weather and weaker gas demand across Texas appear to be easing concern in the spot gas markets over a potential supply crunch resulting from a recent drop in Permian Basin gas production caused, most likely, by wellhead freeze-offs from Jan. 19 to Jan. 21.

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On Jan. 21, spot gas prices across the Lone Star State were down from prior-day settlements. At the West Texas Waha Hub, cash prices dropped more than 20 cents on the day to around $3.64/MMBtu. In East Texas, prices at Houston Ship Channel and Katy Hub were down about 40 to 45 cents to the mid-$3.70s/MMBtu, preliminary settlement data from S&P Global Platts showed.

While statewide gas production in Texas has fallen by nearly 1 Bcf/d over the past two days, with much of the drop concentrated in the Permian Basin, spot and forward gas markets ended the weak on a bearish note, as traders turned their attention to easing weather and demand forecasts.

Weather, demand, production

Over the week ahead, population-weighted temperatures in the Lone Star State are expected to warm to over 50 degrees Fahrenheit where they're forecast to remain through at least early February.

Combined residential-commercial, power and industrial gas demand in Texas should drift lower over that period, falling from about 14.4 Bcf/d on Jan. 21 to just 11.9 Bcf/d by next week. In the eight- to 14-day forecast, statewide gas demand, excluding LNG feedgas consumption, is expected to continue falling to about 10.7 Bcf/d, data compiled by S&P Global Platts Analytics shows.

The bearish demand-side forecast comes just as Texas gas production tumbles.

Over the past two days, total output across the state has dipped to about 23.6 Bcf/d – down from an average 24.5 Bcf/d in the week prior. Much of the decline has come in the Permian Basin where freezing temperatures are a likely culprit. Revised estimates now show daily output there dropping about 550 MMcf/d from Jan. 19 to Jan. 20 as temperatures in Midland, Texas dipped into the low-20s Fahrenheit.

Forwards

While colder weather in West Texas is expected to continue into the weekend, potentially causing further supply disruptions in the Permian, forward gas prices there have largely mirrored activity in the cash markets, easing on the milder temperature outlook.

On Jan. 20, the Waha balance-of-month price dipped to a 22 cents discount to the Henry Hub marking its lowest since the contract rolled to January late last month. Milder weather in Texas even appears to be resetting price expectations for February. According to S&P Global Platts most recently published forwards data, prices for February are now at just an 11 cents premium to the US benchmark – a move the comes little more than a week after the contract surged to as much as a 65 cents premium to the Henry Hub.

During the recent autumn months, both the January and February 2022 contracts at Waha consistently traded at price-premiums to Henry, presumably due to the perceived risk of more production freeze-offs in the Permian Basin this winter.

Despite the imposition of new winterization standards by Texas oil and gas regulators, market concerns over the potential for weather-related supply disruptions have lingered until recently. Last February, a historic winter storm that hit Texas and the Midcontinent was to blame for a roughly 5.2 Bcf/d, or 40%, decline in Permian Basin gas production, Platts Analytics data shows.