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Permian Basin supply fundamentals signal possible rebound for winter gas prices


Dec, Jan, Feb average falls 57 cents to $2.50/MMBtu

Cash market craters on maintenance, weak demand

Permian output likely to remain around 11 Bcf/d

Permian forwards markets could retrace a recent, precipitous drop in winter gas prices as transitory, shoulder-season pressures on the cash market ease and longer-term fundamentals come back into focus.

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On Oct. 2, calendar-month prices for December, January and February settled at $2.04, $2.70 and $2.78/MMBtu, respectively, S&P Global Platts' most recently published M2MS forwards data shows.

After hitting multiyear highs in late September, winter 2020-21 gas prices at Waha have come under pressure recently, with the December contract falling nearly 80 cents from its high. Prices for January and February have recorded smaller losses of about 50 cents and 40 cents, respectively.

Selling pressure on the winter curve has tracked a recent collapse in the Waha cash market, prompted by multiple maintenances in the Permian Basin and weaker shoulder-season demand levels. On Oct. 2, spot prices plunged nearly 40 cents to trade into negative territory before settling at minus 3 cents.

By midday Oct. 5, the benchmark West Texas index had rebounded about 20 cents to trade around 15 cents/MMBtu, preliminary settlement data from S&P Global Platts showed.

As ongoing maintenance events on El Paso Natural Gas and Transwestern Pipeline conclude – likely by late October – and winter heating demand picks up, tighter supply-demand fundamentals are likely to return to the Permian Basin, supporting a steady rise in the Waha cash and forwards markets.

Winter outlook

In October, Permian gas production has averaged roughly 11.2 Bcf/d, or about 14% below prior record-high levels at over 13 Bcf/d recorded in March, S&P Global Platts Analytics data shows.

Over the past nine months, West Texas producers have dramatically slowed drilling activity, pulling more than 350 rigs from the Permian in response to price volatility in oil and gas markets.

On Sept. 30, rig count in the Permian was estimated at 139, up just 11 rigs from an 11-year low in mid-September, data recently published by Enverus DrillingInfo shows.

As Permian drilling activity continues to sputter, recent forecasts published by Platts Analytics are calling for flat to modestly lower gas production there through at least third-quarter 2021.

Reduced supply pressure should keep production takeaway pipelines well below capacity, helping to support prices at Waha. Earlier this year, while Permian production was hovering in the mid-12 Bcf/d area, cash and forwards prices – even for the 2020-21 winter months – traded below $1/MMBtu.


In addition to lower production levels, recent and upcoming midstream expansion project could help to support higher prices at Waha this winter.

Earlier this month, the startup of commercial service on Mexico's Wahalajara Pipeline system, which pulls supply directly from the Permian Basin, was officially announced by developer Fermaca and state electric utility CFE.

Following completion of the pipeline's final segment in central-west Mexico last month, flows on the system already began ramping up in mid-September. In the three-week period since, West Texas exports to Mexico have climbed steadily, recently bouncing above 1 Bcf/d – up from levels around 800 MMcf/d in early September. According to projections from Platts Analytics, the Wahalajara system could offer some 400 to 500 MMcf/d in incremental demand for Permian gas.

In addition to the Wahalajara system, new service on Kinder Morgan's Permian Highway Pipeline – scheduled for startup by first-quarter 2021 – could offer producers an additional 2.1 Bcf/d in takeaway capacity by later this winter.