Analysis: South Texas cash basis rises as exports, lower production tighten regional balances

New York — Cash basis at South Texas natural gas hubs is at significant premiums to year-ago levels in July as strong export demand from Mexico and lower production from the Eagle Ford help to buoy the market.

At key trading locations in South Texas, including Tennessee Zone 0, NGPL South Texas and Texas Eastern STX, basis prices are up about 7 to 8 cents this month to date, compared to the same three-week period last July, S&P Global Platts data shows.

At the three trading locations, cash prices have remained largely discounted to the Henry Hub but are now much closer to price parity with the benchmark index. At the NGPL and Texas Eastern hubs, cash prices are averaging just a 1 cent discount. At the Tennessee location, the cash price discount to Henry Hub is a bit steeper, averaging about minus 5 cents/MMBtu this month.

Recently, rising gas demand from northeast Mexico has offered an incremental outlet for some South Texas supply. Over the past two weeks, pipeline exports from South Texas have jumped to an average 4.2 Bcf/d amid rebounding industrial consumption and an uptick in gas-fired cooling demand in Mexico.

In May, pandemic-related shutdowns of industry and commerce in Mexico had prompted a steep decline in South Texas exports, which briefly fell to just 3 Bcf/d and averaged only 3.6 Bcf/d during the month, S&P Global Platts Analytics data shows.

Recent production curtailments and a slowdown in drilling activity in the Eagle Ford Shale are also helping to limit supply length in South Texas this month. While basin-level output has edged up from an annual low last month as some producers restore previously shut-in wells, month-to-date production estimated at 5 Bcf/d continues to hover about 300 MMcf/d, or nearly 6%, below its year-ago level.

LNG exports

Summer to date, weaker feedgas demand from Texas' two LNG export terminals at Freeport and Corpus Christi has at least partly offset the recent tightening in South Texas supply.

In July, feedgas deliveries in Texas have fallen to an annual low at just 236 MMcf/d, down from a March record high at nearly 2.9 Bcf/d, Platts Analytics data shows.

With previously announced LNG export cargo cancellations continuing through August, any meaningful recovery in US feedgas demand isn't likely to come prior to September. According to recent reporting by S&P Global Platts, significantly fewer announced cargo cancellations during the month could support a rebound in US exports by early autumn.

Market outlook

Currently, forwards markets are pricing in a modest weakening in basis prices over the balance of 2020. At NGPL South Texas and Texas Eastern STX, balance-2020 forwards are now priced at a 4 cent discount to benchmark Henry Hub, down from an average 1 cent/MMBtu discount this month. At Tennessee Zone 0, balance-2020 forwards are about 6 cents below the month-to-date average at minus 11 cent/MMBtu, S&P Global Platts most recently published M2MS forwards data shows.

While stronger LNG exports could limit a buildup in South Texas supply this fall, recent production strength in the Eagle Ford and elevated Texas storage levels this fall could offset or overrun the incremental demand, potentially becoming a drag on regional basis prices.