Pinch Me - Is The Permian Natural Gas Price Rally Real?

After months of severe natural gas pipeline constraints, Permian producers and shippers are reveling in the relief of new takeaway capacity. Kinder Morgan’s Gulf Coast Express (GCX) Pipeline, which began flowing initial volumes in mid-August, last week began full commercial service on its 2-Bcf/d greenfield route from the Permian to South Texas. Actual volumes on GCX are hard to come by, but all indications are that flows are ramping to near capacity. That surge in Permian outflows in recent weeks has propelled natural gas prices at the regional benchmark Waha Hub — which traded as low as $5.00/MMBtu below zero earlier this year and fell into negative territory as recently as August 8 — to nearly $2/MMBtu, levels not seen at the hub since last winter. However, with the sting from negative prices only now just fading, many in the market are wondering if this rally is here to stay or just a temporary reprieve. Today, we look at the latest developments in the Permian natural gas market.

Permian gas prices have been fun to follow, if not trade, this year, and have provided the fodder for many an RBN blog of late. We covered the dramatic unraveling of Permian gas prices to below zero in Don’t Dream It’s Over, and then, more recently, we looked at the budding rise in Permian gas prices with the initial start of GCX in Higher Ground. Now, with GCX entering full service, it looks like prices have really turned the corner, at least for a little while. As an intrastate pipeline — entirely situated within Texas state lines — GCX isn’t required to post daily flow data like federally regulated interstate pipelines do. But comments from the company suggest the pipe was flowing close to 1 Bcf/d a couple of weeks ago, and industry chatter since then suggests that it has continued to ramp up and is perhaps now close to its capacity of 2 Bcf/d. Kinder Morgan also confirmed on September 24 that the pipeline is now fully operational. The incremental takeaway capacity from GCX has almost instantaneously eased what had become crippling transportation constraints for moving gas supply out of the Permian. That, in turn, has allowed regional gas prices to soar, at least on a relative basis compared to where they were in the summer, providing much-needed relief to Permian producers and their likely exhausted gas marketers.

Figure 1 charts the daily average price at the region’s main gas hub, Waha. If you’re not familiar with the hub or need a refresher, you might reference our series on it from the summer of 2017. Also, note that all the historical price date in today’s charts have been provided to us by our good friends at Natural Gas Intelligence (NGI). As you can see, Waha prices have been on a steady trend upward since early August, after falling into the abyss in April and then dipping below zero again a few times over the summer. The good news — for  producers at least — is that Waha has remained above zero now on a sustained basis for the first time in months. Further, prices over the last couple of weeks have been holding steady above $1.50/MMBtu. While that might not sound all that impressive at first, consider that many Permian Basin operators realized essentially zero dollars per MMBtu in the second quarter of this year. For them, $1.50/MMBtu represents a nice addition to third-quarter cash flow and comes at a time when the industry is looking to become as efficient as possible. Consider this: if the entire 10 Bcf/d of Permian natural gas benefitted from the same uplift in price, simple math says that’s about $15 million per day in incremental industry-wide revenue over last quarter. If prices can hold at this level through the end of the year, the additional revenue adds up to almost $1.5 billion. That’s nothing to sneeze at and certainly benefits producers in areas of the basin where wells produce a higher percentage of natural gas, such as Apache Corp.’s Alpine High field. Notably, production at that field had been curtailed since April due to the low prices and just last week has ramped back up to levels last seen in March. That ramp-up is being driven by the fact that Apache holds firm transportation capacity on GCX. In fact, Permian natural gas production overall appears to have increased by almost 0.5 Bcf/d on September 25, the day after Kinder announced the official start-up of GCX.