Analysis: Permian supply concerns push SoCal winter gas prices toward record highs

Denver — SoCal Gas city-gate winter 2020-21 forwards prices are now at their highest since early May as stalling West Texas gas production and shifting regional fundamentals boost competition for Permian supply.

On Aug. 14, calendar-month prices for December, January and February settled at $4.83, $4.62 and $4.30/MMBtu, respectively – nearly at par with record highs recorded in May. At an average $4.58/MMBtu, peak winter-season prices at SoCal Gas are also trading nearly 50 cents above last winter's historical average, S&P Global Platts' most recently published pricing data shows.

This spring, market concern over the fate of associated gas supply flowing west from the Permian Basin lifted the SoCal forward market sharply as West Texas crude prices tumbled to record lows. Despite a subsequent and precipitous decline in drilling activity there, SoCal prices eased by mid-summer as production from previously curtailed wells was brought back online, lifting associated gas output.

More recently, though, market jitters have resurfaced as the slowdown in Permian activity has left West Texas production growth in the lurch. By the fourth quarter, S&P Global Platts Analytics anticipates renewed declines in Permian gas supply could emerge as output from maturing wells begins falling.

Month to date, Permian production is already on the decline, averaging 11.2 Bcf/d – down about 300 MMcf/d compared to the July average when the recovery in associated output peaked.

Shifting regional dynamics

Stalling production in the Permian Basin has buoyed gas prices at the West Texas benchmark Waha Hub in recent months, driving a shift in regional price spreads and flow dynamics. By 2021, price spreads and flows could come under additional pressure prompted by the startup of new pipeline infrastructure as well as production declines in neighboring regions.

Combined, the recent and upcoming market changes are increasing competition for Permian gas and disrupting traditional supply routes to West Coast markets, like SoCal Gas.

April 1 to date, cash prices at Waha have averaged $1.09/MMBtu, up sharply compared with prices over the same period in 2019 when the West Texas spot market averaged just 12 cents/MMBtu. As a result, spreads from Waha to key western supply hubs such as El Paso San Juan have narrowed, reducing the incentive for gas to flow westbound from the Permian.

Since the start of April, total westbound flows on El Paso Natural Gas and Transwestern Pipeline have averaged 3.39 Bcf/d, down about 180 MMcf/d compared with flows over the same period last year, Platts Analytics data shows.

By first-quarter 2021, the startup of Kinder Morgan's 2 Bcf/d Permian Highway Pipeline will likely put additional pressure on westbound supply routes as Permian producers gain incremental access to premium-priced markets along the US Gulf Coast. By Q3 2021, startup of the separate Whistler Pipeline project will offer West Texas producers another 2 Bcf/d in flow capacity to the Gulf.

According to Platts Analytics, an expected decline in Rockies production could further enhance competition for Permian Basin gas heading into 2021. As regional output falls, stronger gas prices there will likely divert additional El Paso San Juan supply from south-to-north into the Rockies, driving commensurate price increases in West Coast markets, such as SoCal Gas, as they're forced to step up to competition for Permian supply.