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Analysis: Permian natural gas flows to US Southwest remain strong despite Gulf Coast Express


Pipeline utilizing new gas production

High supply looks to depress Southwest prices

Denver — The startup of Gulf Coast Express pipeline has failed to lower natural gas flows from the Permian Basin to the Southwestern US, which will likely lead to lower prices in the region moving forward.

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Gulf Coast Express entered commercial service on September 25, adding 2 Bcf/d of new takeaway capacity from the Permian for delivery to Gulf Coast markets. Once online, it was expected Gulf Coast Express would not only utilize some new Permian production, but also use volumes that were flowing from the Permian to the Southwest and Midwest regions.

However, with the project now online for more than two weeks, little to no displacement has occurred from volumes flowing out of the Permian to the surrounding regions. The new pipeline has apparently filled with new Permian production and supply previously flowing on intrastate pipelines, according to S&P Global Platts Analytics.

Focusing mainly on the Permian outlet to the Southwest along El Paso's San Juan Crossover, the continuation of strong flows toward the San Juan will likely once again bring strong bearish prices across the Southwest this spring, similar to April and May of this year.

Prior to Permian constraints, El Paso San Juan gas typically traded around a 9 cent/MMBtu discount to Waha hub, which incentivized flows to move from the San Juan into Texas. Beginning in June 2018, as the Permian became more and more constrained, the relationship switched and El Paso, San Juan averaged a 17-cent premium to Waha, incentivizing flows to switch and begin flowing northwest out of the Permian and into San Juan.

The widest spread was observed this spring as Waha prices went negative in April and May, causing the Waha to San Juan spread to increase to $1.48/MMBtu. Although preads between the two hubs have narrowed to 31 cents/MMBtu this month, its lowest level since October 2018, outflows from the Permian to the San Juan remain near capacity at 450 MMcf/d because the spread remains well in the money, according to Platts Analytics.

As Permian production continues to ramp up and fill Gulf Coast Express with new production over the next couple months, the likelihood of weakening northwest flows along San Juan Crossover becomes lower and lower.

The current forward curve supports continued flows from the Permian to the San Juan as spreads haven widened, even from just a month ago, to $1/MMBtu beginning in April. The additional 400-500 MMcf/d of supply into the San Juan area will once again place downward pressure on regional prices across the Southwest, according to Platts Analytics. Additionally, it is likely that south to north flows from the San Juan into the Rockies will also continue as demand in the Southwest and Southern California is limited, especially during shoulder seasons.

-- Brandon Evans,

-- Jack Winters,

-- Edited by Richard Rubin,