Permian drilling slowdown fuels bullish turn for West Texas spot gas market

Houston — Permian Basin spot gas prices are at their highest in over 19 months in the week starting Nov. 1 as West Texas production stumbles, heating demand rises, and a series of recent maintenances roll off.

In Nov. 3 trading, cash prices at the Waha Hub jumped nearly 50 cents to $2.42/MMBtu as Permian gas production slipped below 10 Bcf/d for the second time in just over a week.

The single-day rally is no fluke. Over the past seven days, the spot market at Waha has averaged $2.30/MMBtu, recently hitting a 19-month high-settlement at $2.55/MMBtu, S&P Global Platts data showed.

Since late October, cash markets at Waha and other West Texas hubs are up from negative territory. The stunning turnaround began with an end to recent maintenance work on El Paso Natural Gas and was spurred on by an influx of unseasonably cold weather. The sustained rally in West Texas gas prices above the $2/MMBtu level, though, appears to be fueled by recent production weakness.

Production

Over the past two weeks, Permian Basin gas production has averaged just 10 Bcf/d. Output is down about 750 MMcf/d compared with the September monthly average and nearly 2.3 Bcf/d lower compared to its summer high, data compiled by S&P Global Platts Analytics shows.

Lower production comes following a dramatic slowdown in drilling activity earlier this year. From January to August, operators in the Permian Basin pulled some 365 rigs from West Texas, dropping the count there to a record-low 127, data compiled by Enverus DillingInfo shows.

In addition to lower rig counts, well completions in the Permian have also slowed dramatically. Since May, completions have averaged 133 per month – down sharply compared with a completion rate that averaged over 440 wells per month during first-quarter 2020. In September, well completions in West Texas were flat on the month, totaling 155, data from the US Energy Information Administration showed.

Maintenance, weather

The recent completion of pipeline maintenance on El Paso and the arrival of colder weather in late October have also been key factors supporting the rally in Permian Basin cash prices.

On Oct. 26, El Paso completed its final October maintenance at the Wink compressor station, allowing an additional 200-300 MMcf/d in Permian gas production to access the system and expanding pipe's access to other eastbound flow corridors. The maintenance's end fueled a nearly $3 rally at Waha on Oct. 27, lifting cash prices to a settlement at over $2/MMBtu --- up from negative territory the prior day.

In October, El Paso carried out a series of seemingly continuous maintenances, limiting upstream receipts and curtailing access to key end-user markets to the east and west. During the month, Waha prices averaged just 44 cents/MMBtu and dipped into negative territory on 10 non-consecutive days.

Colder weather, which has moderated some this month, was initially a driving factor behind the rally in West Texas gas prices.

From Oct. 27 to Oct. 28, average temperatures in Midland, Texas plunged to below freezing, while temperatures in neighboring demand markets dipped into the 30s to 40s Fahrenheit, prompting a steep rise in heating demand. With temperatures expected to turn sharply lower in the days and weeks ahead, weather is likely to become an increasingly key driver in helping to sustain the Permian rally.