Forwards traders are betting on premium gas prices in the Permian Basin this winter after a recent slowdown in drilling activity there begins taking its toll, putting downward pressure on production.
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In recent trading, peak-winter gas prices at Waha have moved to a premium over the Henry Hub. On Sept. 29, the January 2024 contract at Waha settled at $3.69/MMBtu, or about 12 cents premium to the benchmark while the February contract finished trading at $3.64/MMBtu, or 15 cents above Henry Hub, S&P Global Commodity Insights' most recently published M2MS forward data showed.
Premium winter gas prices at Waha, which are now trading at annual highs versus Henry Hub, come amid a continued slowdown in drilling activity across West Texas and eastern New Mexico.
In late September, the number of drilling rigs operating in the Permian dropped to a 12-month low at 319 -- down from a post-pandemic high in April at 364, legacy IHS rig data from S&P Global showed. As the number of drilling rigs continues to decline, so too have new well starts and completions. In August, Permian producers drilled some 450 wells -- down from 461 in July and the fewest in 15 months. Well completions, meanwhile, totaled 453 in August -- a number that has remained roughly flat since June and is notably lower compared with an annual high at 523 in March, the US Energy Information Administration's latest Drilling Productivity Reportshowed.
As overall activity in the Permian Basin slows, so too has gas production.
In September, output in the Permian dropped to an average 18.1 Bcf/d, down from a record-high average at nearly 18.6 Bcf/d in August, according to data from S&P Global.
As the pace of Permian drilling and production eases, traders now appear to be anticipating relatively higher winter basis prices there, easing pressure seen in recent months caused by dwindling available pipeline capacity. The bullish seasonal outlook at Waha also comes as the startup date for at least two brownfield gas pipeline expansions nears, promising additional relief from midstream constraints.
This fall, at least two brownfield gas pipeline expansions are expected to enter service. As soon as this month, the 2 Bcf/d Whistler Pipeline could offer additional capacity of up to 500 MMcf/d from the line's Waha header in the Permian Basin to its terminus at Agua Dulce, Texas, according to consortium owners MPLX, WhiteWater and a joint venture between Stonepeak and West Texas Gas.
Another long-awaited brownfield expansion on Kinder Morgan's 2.1 Bcf/d Permian Highway Pipeline, which should offer up to 550 MMcf/d in additional capacity, could see a startup date soon after -- potentially as early as December 2023, according to the midstream developer.