New York — Rebounding associated gas production in the Permian Basin has been weighing on balance-of-summer prices at Waha recently as forwards markets reevaluate the outlook for Texas' supply-demand fundamentals.
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Through June 15, Permian gas production is averaging 10.9 Bcf/d this month as easing well curtailments lift output from a 16-month low at just 9.8 Bcf/d on May 20.
As Permian production continues to rebound, rising above 11 Bcf/d recently, forwards markets are pricing in a weaker summer curve at Waha. On June 12, balance-June, July and August forwards settled at their lowest since mid-April at an average $1.40/MMBtu. In early May, the summer strip had climbed to a high at over $2/MMBtu, S&P Global Platts most recently assessed M2MS data shows.
In the context of continued demand weakness and elevated gas storage levels in Texas, it's possible that the forward market selloff in the Permian could continue in the days and weeks ahead.
Following the resumption of economic activity and the easing of social distancing measures in Texas, gas demand has been slow to recover in the Lone Star state.
Month to date, Texas LNG feedgas demand has averaged just 540 MMcf/d as cargo cancellations slow utilization rates at the state's export terminals at Corpus Christi and Freeport LNG. Earlier this year, LNG feedgas demand in Texas reached record highs at over 3 Bcf/d, S&P Global Platts Analytics data shows.
Recent market reports by Platts pricing teams in Europe and Asia indicate significant risk for additional cargo cancellations in July and August too, potentially keeping Texas feedgas demand lower for longer. Adding further risk for the Texas market, the Corpus Christi and Freeport terminals appear to have led the recent US decline LNG exports.
Adding more pressure to recent and looming demand weakness, a slowdown in gas consumption at Texas refineries and chemical facilities has continued into June, with modeled industrial demand averaging 4.4 Bcf/d this month to date – down from year-ago levels closer to 4.8 Bcf/d.
According to Platts Analytics, industrial gas demand will be slow to recover in the months ahead as a deepening global recession limits demand for industry outputs such as petroleum, petrochemicals and steel.
As Permian gas production rebounds and industry-wide demand for the fuel continues to lag, Texas storage inventories are now at their highest mid-June level since 2016. On June 15, modeled data showed inventories surpassing 465 Bcf – equivalent to a more-than 100 Bcf surplus to year-ago levels.
A recent forecast from Platts Analytics shows total US inventories continuing to rise in the weeks ahead, with EIA-reported balance-of-June injections expected total 284 Bcf, or nearly 60 Bcf more than the five-year average over the period.
Recent production forecasts show Permian output continuing to climb through the summer, reaching an average 11.8 Bcf/d in August before easing again into the fourth quarter.
In the near term, the opening of new downstream capacity in Mexico could provide some 400 MMcf/d in additional demand for Permian production by later this summer – a timeline that now hinges on the outcome of an ongoing negotiation between Mexican grid operator Cenagas and pipeline developer Fermaca. According to Platts Analytics, the mechanically complete Wahalajara pipeline system could start operation by August.
Regardless, over the past six weeks, forwards markets have continued to cut fourth-quarter prices at Waha. On June 12, the three-month strip settled at an average $1.75/MMBtu, down from an early May high at $2.40/MMBtu, S&P Global Platts data shows.