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ANALYSIS: East Texas forward gas prices strengthen as tighter summer balances loom

Highlights

Katy, HSC Q3-forwards pricing at parity to Henry Hub

Permian production down 300 MMcf/d, post freeze-off

Texas storage down 100+ Bcf from mid-March 2020

New York — Forward gas traders in East Texas are pricing in tighter market balances than previously expected for 2021, as the lingering supply impact of this winter's historic freeze meets with stronger export demand.

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Month to date, cash prices in East Texas have remained steeply discounted to Henry Hub gas. At Houston Ship Channel, prices have averaged 17 cents below the US benchmark. At the nearby Katy Hub, prices have traded at an average 13 cent discount, S&P Global Platts data shows.

By later this year, forward traders are anticipating a major turnaround, pricing both locations at near-parity to Henry Hub during the upcoming summer months.

Historically, the East Texas price discount to Henry Hub often narrows during peak-demand months. The outlook for this summer, though, has strengthened over the past five weeks following this winter's historic freeze-off and its impact on Texas gas production and storage.

Production, storage

In mid-February, as arctic weather swept across the continental US, shale basins from West Texas to North Dakota were hit by a historic wave of wellhead freeze-offs. Almost overnight, US production dropped 17 Bcf/d, or more than 18%, data compiled by S&P Global Platts Analytics shows.

In the Permian Basin alone, output fell 3.6 Bcf/d, or about 30%. By late-February, production had staged a V-shaped recovery rising to about 11.8 Bcf/d. In the nearly three weeks since, though, Permian output has waned, falling to 11.7 Bcf/d – about 300 MMcf/d below its 30-day average prior to the freeze off.

According to a recent forecast from Platt Analytics, West Texas production should climb back above 12 Bcf/d by later this month, but will remain roughly flat at that level through the early summer. Not until late 2021 is production expected to eclipse its prior record highs near 13 Bcf/d, recorded in Q1 2020.

Potential upside price risk from weaker production could be magnified by lower summer storage levels in Texas – another result of this February's historic Polar Vortex weather. Through mid-March, Texas gas storage is estimated at 218 Bcf, or more than 100 Bcf below its year-ago level, according to Platts Analytics data.

Export demand

Supply-side pressure on the East Texas gas market, which likely accounts in large part for the recent appreciation in basis prices there, could be further exacerbated by an uptick in summer-season export demand, compared to last year.

At Texas' two LNG export terminals, Freeport LNG and Cheniere Energy's Corpus Christi, feedgas flows are forecast to remain around 80% to 90% of capacity this summer. Last year, record-low global gas prices resulted in a temporary shut-in of capacity there, with export demand falling to an average 655 MMcf/d from June to August 2020 – less than one-quarter of the facilities' total capacity at that time.

In addition to stronger summer-on-summer LNG demand, pipeline exports to Mexico are also expected to pick up. Last summer, pandemic-fueled economic lockdowns across Mexico saw US exports south of the border fall below 5 Bcf/d from June to August 2020. This year, pipeline exports from Texas to Mexico should average closer to 5.5 Bcf/d, according to Platts Analytics.