Basis prices in the East Texas gas market are down sharply following the recent suspension of feedgas deliveries to Freeport LNG. With the facility expected to remain offline through June, the added supply could boost regional storage levels in a potentially longer-term impact to the East Texas market.
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Register NowIn June 10 trading, cash prices at East Texas hubs were up on the day as hotter weather fueled a spike in cooling demand across the Lone Star State. Despite the cash market gains, basis prices at Houston metro-area hubs have tumbled over the last several days as the region's supply balance lengthens.
At Houston Ship Channel, basis prices are now trading at a roughly 40 cents discount to the Henry Hub. At Katy, spot basis is now about 45 cents behind the US benchmark. At both locations, basis discounts are down 20 cents or more compared with 30-day averages prior to the shut-in at Freeport LNG, data from the Intercontinental Exchange and Platts showed.
Weaker basis prices in East Texas could be expected to endure – at least through the end of June. In recent trading, balance-of-month forward basis at Katy and Houston Ship Channel has weakened considerably to trade around 30-35 cents discount to the Henry Hub, Platts M2MS forwards data shows.
Freeport shutdown
Late morning June 8, a fire as the Freeport LNG terminal prompted an immediate shutdown of the facility's three liquefaction trains. In a statement issued later that day, the terminal operator said that the facility would remain shut down for at least three weeks, with no further details on the incident's cause.
On June 8, feedgas flows to the Quintana Island plant tumbled to just 390 MMcf/d and have been subsequently reported at zero from June 9-10. In the 30 days prior to the incident, feedgas deliveries to Freeport averaged nearly 2 Bcf/d, S&P Global Commodity Insights data shows.
From June 8-9, NYMEX gas futures prices tumbled in the wake of the news, falling to an overnight low near $8/MMBtu. While prices have rebounded to the upper-$8 range over the past two days, doubts over the outage's duration have cooled the bull market, which was trading at over $9 earlier this week.
Over the coming days and weeks, the roughly 2 Bcf/d in additional supply could have its most discernable and lasting impact on the South Central gas storage region, where stocks are at their lowest in three years, data from the US Energy Information Administration shows.
South Central storage
As of the week ended June 3, inventories in the South Central region are now estimated at 843 Bcf – nearly 130 Bcf or about 13% below the prior five-year average for the corresponding week.
This summer, market observers and analysts had expected the South Central storage region to face headwinds in the effort to rebuild stocks – especially during the peak-cooling period from mid-July to late August when salt dome inventories there are typically drawn down to meet spot-market demand.
Following the shut-in at Freeport, though, forecasts previously calling for record-high US LNG export demand at over 13 Bcf/d in June, July and August, have since been revised downward. Based on average terminal flows of roughly 2 Bcf/d to Freeport, US exports of LNG are likely to average closer to 11 Bcf/d as long as the three-train facility remains fully shut-in.
With Freeport LNG expected to remain offline through at least the end of June, an additional 40 Bcf or more previously unforeseen gas supply in the East Texas market could be redirected toward storage, potentially helping the region to recover from its steep inventory deficit.