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Permian forward gas prices turn negative as 2020 outlook weakens

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Waha April contract settles at minus 2 cents/MMBtu

Balance 2020 curve loses more than half its value since late December

Denver — In a first ever, Permian forward gas prices settled in negative territory this week as the 2020 market outlook for pipeline capacity exiting the West Texas basin continues to deteriorate.

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On Tuesday, the April calendar-month contract was assessed at minus 2 cents/MMBtu. Forwards prices for May appeared to be headed in the same direction, ending the day at just 6 cents/MMBtu.

As the gas market continues to sour on the Permian, the balance 2020 forward curve at Waha has lost more than half its value in the past month, settling at just 40 cents on Tuesday.

In the cash market, the steady rise in Texas LNG feedgas consumption has helped to buoy prices this winter, along with more recent gains in seasonal heating and power burn demand.

Month to date, spot gas prices at Waha have averaged 67 cents/MMBtu, S&P Global Platts data shows.

GULF COAST EXPRESS

In mid-March 2019 – six-months prior to the startup of Kinder Morgan's Gulf Coast Express Pipeline – forward market optimism for Permian gas prices peaked as the 2020 curve briefly topped $2/MMBtu.

After it entered service in late September, though, a widening spread between Permian and East Texas gas prices appeared to indicate that the project had quickly filled to its full, 2 Bcf/d capacity.

Flows on the intrastate Gulf Coast Express aren't reported publicly, but gains in Permian gas production since last summer would be enough to fill about 65% of the pipeline's total capacity.

Over the past 30 days, output in the Permian has averaged 11.5 Bcf/d – equivalent to a 1.3 Bcf/d gain compared to production levels in the month prior to the full startup of Gulf Coast Express.

OUTLOOK

On Wednesday, Kinder Morgan was preparing to report its fourth-quarter earnings after market close, potentially offering new insight on the developer's Permian Highway Project.

Concerns about the possible return of negative prices, which plagued the Permian gas market for extended periods in 2019, were exacerbated in late October when executives at Kinder announced a three-month delay to startup of the 2.1 Bcf/d pipeline – now scheduled to enter service by first-quarter 2021.

According to a midstream analysis from S&P Global Platts Analytics, the Permian's effective production takeaway capacity maxes out around 12.9 Bcf/d. Including an estimated 700 MMcf/d absorbed by local demand then, producers in West Texas could push output to about 13.6 Bcf/d, at which point in-basin cash prices are likely to turn negative again.

Current forecasts show average daily Permian gas production surpassing the critical 13.6 Bcf/d level by later this year. Still, a diminishing appetite among producers for capital spending in the current low-price commodity environment could slow gas production in West Texas this year.

Earlier this month, rig count in the Permian dipped below 400, its lowest in 29 months. Total Permian rigs are now down about 20% from a multiyear high at 500 in November 2018, Enverus data shows.