SoCal Gas summer 2021 forward curve hits 3-year high amid mounting supply concerns

New York — A tightening supply outlook for Southern California's gas market is fueling a rally in forward strip prices there as shifting regional flow dynamics and upcoming system maintenance make for a bullish scenario.

Since the start of January, the SoCal Gas city-gate April-to-October strip has gained 60 cents, or over 17%, most recently settling at an average $4.04/MMBtu, S&P Global Platts' M2MS forwards data shows.

The steady rise in Southern California's summer strip prices comes in response to lackluster production from the Permian Basin and emerging competition for its gas supply – historically of critical importance for Southern California.

More recently, news from SoCal Gas about an upcoming summer-long maintenance in the utility's service area has added fuel to the forward-market rally as concerns over reduced transmission capacity mount.

Permian supply

Year to date, growth in Permian Basin gas production has been slow coming.

Through late March, output from the West Texas shale basin has averaged about 11.6 Bcf/d, according to data from S&P Global Platts Analytics. After reaching its zenith at over 12.8 Bcf/d in March 2020, production from the Permian fell sharply last summer amid a global fallout in commodity prices. It suffered another brief but steep decline last month amid a historic wellhead production freeze-off in Texas and the Midcontinent.

Permian producers have since struggled to regain their momentum. With an estimated 224 rigs currently operating in the basin, drilling activity now stands at just over half of its first-quarter 2020 pace.

Lower production in the Permian has been exacerbated by growing competition for its gas. In January, the startup of Kinder Morgan's Permian Highway Pipeline opened a new eastbound corridor for the basin's supply. While flows on the intrastate pipeline are not publicly reported or directly observable, a subsequent narrowing in the price spread from Waha to East Texas would suggest that the 2.1 Bcf/d pipeline is now moving a significant volume of gas into the Gulf Coast market.

Westbound flows are another clear indicator of the Permian Highway's supply impact. Year to date, gas moving west from the Permian has averaged about 3.3 Bcf/d with flows down sharply compared with year-ago levels when the average was closer to 3.9 Bcf/d, Platts Analytics data shows.

Maintenance

Reduced westbound gas transmission from the Permian to New Mexico, Arizona and ultimately to Southern California could be exacerbated by upcoming pipeline work in the SoCal Gas service area.

In a recent system maintenance outlook published to the utility's electronic bulletin board, or EBB, shippers were warned of planned pipeline remediation work in SoCal Gas' Northern Zone from May 1 to Sept. 30 – roughly corresponding with the peak-demand months of Southern California's cooling season. The scheduled maintenance will cut supply to the region by up to 700 MMcf/d – nearly halving its available gas supply this summer.