ANALYSIS: Waha cash market rallies amid lower Permian gas production, record LNG export demand

New York — Permian Basin spot gas prices have been surging back toward annual highs in recent trading as West Texas production stumbles and rising LNG export demand pulls more supply eastbound to the Gulf Coast.

Over the past several trading days, the cash market at Waha is up about 70 cents/MMBtu.

On Nov. 11, prices at the benchmark West Texas location were up another 3 cents to $2.52/MMBtu, preliminary settlement data from S&P Global Platts showed.

In early October, a combination of short-lived factors pushed the market to a nearly 20-month high at $2.91/MMBtu. That move was followed by a sharp retracement in prices earlier this month.

The current rally, though, could be more sustainable following recent and more enduring changes in regional supply-demand fundamentals. In fact, forwards markets are already betting on it.

In November, the balance-of-month gas contract at Waha has traded at an average $2.39, most recently settling Nov. 10 at $2.47/MMBtu. At expiration in October, the balmo contract end trading at just $1.59/MMBtu – more than $1/MMBtu below the cash market at that time, S&P Global Platts M2MS data shows.

Production

Higher cash prices at Waha have accompanied a recent downturn in gas production that has given producers additional pipeline capacity and improved optionality for reaching end-user markets.

Month to date, Permian output has averaged 10.4 Bcf/d – down about 65 MMcf/d compared to the prior-month average and nearly 300 MMcf/d lower compared to September.

After restoring output at curtailed wells this summer, West Texas gas production briefly climbed to over 12.2 Bcf/d. Since early July, though, Permian supply has been on a steady downward trend as reductions in drilling and completion activity begin taking their toll.

According to S&P Global Platts Analytics, recent rig and capital-expenditure cuts in the Permian will likely keep production below 11 Bcf/d until at least mid-2021.

LNG demand

Record-high LNG export demand has also helped to support the Permian gas market recently.

In November, feedgas demand from US terminals has averaged over 10.2 Bcf/d – its highest monthly average on record, according to Platts Analytics.

Stronger demand, particularly at terminals along the Texas and Louisiana Gulf Coast, has increased the call on Permian supply.

For the week ended Nov. 5, eastbound flows from the Permian climbed to an average 5.3 Bcf/d, up from an estimated 4.8 Bcf/d in the three weeks prior. In November, outflows from Texas to the Southeast are also up sharply, averaging about 4.5 Bcf/d month-to-date, compared with a 2.7 Bcf/d average in October, Platts Analytics data shows.