New York — The price gap between Permian Basin oil and gas will continue to widen as steady demand for crude continues to overwhelm oversupplied natural gas markets, an analysis by S&P Global Platts showed Monday.
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Permian natural gas prices have fallen to record lows as planned maintenance on key transmission lines strands gas, forcing some regional gas processing plants to flare, according to recent filings with Texas state regulators.
However, as takeaway crude pipeline capacity grows, so does demand for oil, pulling up gas production along with it.
Disparity between value of the two hydrocarbons will be heightened by a spate of work on natural gas takeaway pipelines planned for April. This will further depress natural gas prices while Midland oil prices are likely to rise as more takeaway capacity comes online to carry it to US Gulf Coast refiners and export markets.
April's Permian crude production is expected to reach 4.177 million b/d, according to Energy Information Administration data, up 8,000 b/d from March while April natural gas output will increase to 14,075 MMcf/d from March's 13,859 MMcf/d.
CRUDE PRICES REMAIN SUPPORTED
Coming online of the expansion of Enterprise Products Partners' Midland-to-ECHO crude line increased Permian crude takeaway capacity by 45,000 b/d in March. An additional 200,000 b/d is due online in April once EPD completes the conversion of its Seminole NGL line to run crude through its Midland-to-ECHO II project, according to S&P Global Platts Analytics.
Higher crude takeaway helped narrow the front-month price discount WTI Midland held to WTI at Magellan East Houston export terminal to an average $6.40/b so far in the second quarter from the $7.52/b average in the first, Platts pricing data showed.
Second-month spreads between the two locations are even tighter, averaging $5.96/b in Q2 to date, showing how anticipated growth in takeaway capacity increases the value of Midland barrels. Q1 spreads showed WTI Midland held a $7.64/b discount to WTI MEH.
Another 2 million b/d of pipeline takeaway capacity is due online by year-end, according to Platts Analytics estimates, including the 900,000 b/d Gray Oak pipeline due online in the fourth quarter.
Further out, Analytics estimates as much as 2 million b/d of additional Permian takeaway capacity online by the first half of 2021, including the 1 million b/d Wink-to-Webster pipeline planned by ExxonMobil, Plains All American, and Lotus Midstream, with as much as 6 million b/d of takeaway capacity available by 2020.
However, overbuild could cancel or merge planned projects, with the planned Permian Gulf Coast pipeline project expected to be rolled into ExxonMobil's project.
Refiner Delek US, which runs 207,000 b/d or 70% of Permian Basin crude through its four refineries, notes only 56% of planned pipeline construction was completed in the 2015-2017 period, at a smaller than originally planned capacity.
Its sponsored master limited partnership, Delek Logistic Partners, has a stake in the Permian Gulf Coast pipeline, along with others, but the withdrawal of Magellan Midstream from the project in March makes it unlikely to proceed.
NEAR-TERM NATURAL GAS PRICES REMAIN NEGATIVE
Natural gas prices have been sinking as production rises and no new takeaway capacity is due until October 2019, when Kinder Morgan's Gulf Coast Express comes online, according to Jefferies Nat Gas Monitor.
Over the past two weeks, natural gas prices have been in free fall, with Waha cash basis dwindling to an all-time low of minus $8.46/MMBtu on April 3, compared with the average minus $1.43/MMBtu over the past year, according to Platts pricing data.
That same day, EP Permian cash basis widened to minus $7.92/MMBtu, after averaging minus $1.36/MMBtu over the past year. The spot price declined $1.92 and settled at minus $5.25/MMBtu, also an historical low.
Spot prices in other Permian basin pricing points such as the EP West Texas and Transwestern also plummeted to historical lows amid record high production levels, limited takeaway capacity and maintenance activities.
Planned work on EPNG and Transwestern systems will further restrict takeaway capacity out of the region, potentially maintaining price that already heavily suppressed, according to S&P Global Platts Analytics.
"According to EPNG's April maintenance schedule, the Keystone Compressor Station in Kermit County, Texas, will undergo maintenance throughout April and restrict flows upwards of 200 MMcf/d from normal levels down to approximately 500 MMcf/d through gas day 22," Platts Analytics said.
"The second maintenance is on Transwestern's Compressor Station 8 in Corona, New Mexico, which began on gas day 2 and could affect westbound receipts from the Permian onto the East Mainline estimated to end gas day 18, reducing receipts from 750 MMcf/d down to 480 MMcf/d," Platts Analytics said.
"Westbound Permian supply through Transwestern is currently at about 870 MMcf/d, a decrease of 110 MMcf/d from flows observed last month," Platts Analytics said.
Last week, several Permian large gas processing plants filed reports with the Texas Commission on Environmental Quality warning of flaring beyond permitted levels to burn off excess natural gas.
This included WTG South Permian Midstream's Benedum Gas and Sale Range Gas plant. The company said in Friday's TCEQ filing for the two plants that it expected "sales gas to be flared due to current market conditions" between April 5 and April 9.
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