Peak winter-season prices at Waha have climbed to a steep premium over the Henry Hub recently as the West Texas gas market faces an emerging supply crunch for the upcoming heating season.
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In recent trading, calendar-month forwards prices for January and February 2022 have strengthened to more than 30 cents premium to the US benchmark, up from 15 to 20 cents discount earlier this year.
On Oct. 4, the two contracts settled modestly lower at 25 to 26 cent premium to Henry Hub, S&P Global Platts' most recently published M2MS forward data showed.
Over the past decade, Waha has traded at reliable discounts to Henry Hub, with various notable exceptions – among them, last winter's historic freeze-off event in the Midcontinent and Texas.
This season's rising winter premium at Waha, which has accelerated in recent weeks, comes amid a sustained decline in Permian gas production this year. The increasingly bullish outlook has also been fueled by rising demand for West Texas gas from both the Gulf Coast export market and the West Coast.
Over the past six weeks, Permian Basin gas production has averaged just 12 Bcf/d. In the corresponding, late-summer period last year, output from West Texas had averaged over 12.8 Bcf/d.
Since last winter's historic freeze-off, Permian production has suffered a sustained contraction, lagging prior-year levels for much of 2021. Following a leveling off in the Permian rig count this summer to around 260, lower production levels now look increasingly baked-in for the upcoming winter season.
While S&P Global Platts Analytics has offered a slightly more optimistic outlook for Permian production in the fourth quarter 2021, any operator plans for growth in the months ahead could face headwinds from continuing maintenance on El Paso Natural Gas. Since mid-August, a yet unresolved force majeure on the pipeline has limited westbound flows from the Permian by nearly 570 MMcf/d.
Regardless of any potential production growth this quarter, demand for Permian supply is only likely to grow this season amid fierce competition from end-users in the Gulf Coast and West Coast markets.
To the east, LNG liquefaction facilities along the Texas and Louisiana coasts should be running at full throttle this winter as gas demand from Europe and Asia crests with the peak of heating season. In Northeast Asia, the JKM spot import price surged to a fresh record high Oct. 5 at nearly $40/MMBtu.
On the West Coast, southern California's gas market also faces the potential for another record run-up in prices this winter. Continued pipeline maintenance in the SoCal Gas service area will keep imported gas supply tight while drought conditions simultaneously limit the availability of hydropower imports.
A recent proposal by the California Public Utilities Commission to increase working gas at the Aliso Canyon storage facility in southern California could help to ease market tightness this summer. Regardless of the proposal's fate at the commission's Nov. 4 meeting, West Coast demand for Permian gas is only likely to rise in the months ahead as colder weather arrives in Southern California, Arizona and New Mexico.