Cash basis prices at Waha are trading at their lowest in over five-years this month as weaker autumn gas demand and record Permian Basin production test the limits of midstream capacity in West Texas.
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Month to date, spot gas at Waha has traded at an average $2.74/MMBtu discount to the benchmark Henry Hub – more than $2.30 below its October 2021 average and its weakest for the month of October in more than five years, data from S&P Global Commodity Insights shows.
Historic basis price weakness at Waha started last month as Permian gas production edged up toward the mid-15 Bcf/d range. Producers' push to boost output back toward record territory came just as cooler weather began putting the brakes on gas demand in West Texas and other neighboring markets.
By mid-September, cash basis at Waha had fallen out of its prior five-year range to trade at discounts of more than $2/MMBtu. In late September, a steep decline in regional gas demand briefly dropped spot prices in West Texas to nearly $5 below Henry Hub, or just $1.77 outright.
While a drop in basis prices at Waha and other West Texas locations is not unusual in the lower-demand periods of fall and spring, the depth of this season's drop is striking and is likely the result of increasing congestion on the Permian's production takeaway pipelines.
Over the past six weeks, outbound gas transmissions from the Permian Basin have averaged nearly 14.4 Bcf/d, marking an increase of about 150 MMcf/d just since August. Compared with the year-ago period, flows are up by nearly 460 MMcf/d. According to S&P Global data, the Permian's theoretical outbound transmission capacity currently hovers around 17 Bcf/d.
Based on current cash and forward valuations at Waha, though, it appears that severe price dislocations in West Texas are not only possible, but likely here to stay – long before production reaches that theoretical cap.
Over the past several years, the additional new capacity of Gulf Coast Express, Permian Highway and Whistler Pipeline had many analysts and market observers anticipating a longer growth runway for Permian production. The additional 6 Bcf/d in midstream capacity added by the three expansions, though, has been quickly consumed by rapid production growth. In October, modeled Permian production is now estimated at an average 15.2 Bcf/d, marking a gain of nearly 2 Bcf/d since October 2020.
On the forward market, gas traders are already bracing for more price pain at Waha. In recent trading the balance-of-month contract has dipped to a nearly $4 discount to Henry Hub, with November now priced only slightly higher, Platts' M2MS forwards data shows.
Stronger demand during the peak-winter heating months is expected to offer some reprieve for producers, with Waha forwards for December, January and February now trading around $1-2 below Henry Hub. By second quarter, though, steeper discounts are currently priced-in with no significant relief expected until late 2023 when brownfield expansions on Gulf Coast Express, Permian Highway and Whistler Pipeline are expected to begin ramping up, adding another 1.7 Bcf/d in additional midstream capacity.