Waha Rollercoaster - Permian Natural Gas Prices Ride Constraint-Driven Volatility

There was a time when natural gas prices in the Permian Basin spent most of the summer bouncing within a few cents of the benchmark Henry Hub, as ample pipeline takeaway capacity and seasonally strong demand combined to keep a lid on price blowouts. Times have certainly changed, with ballooning local production overwhelming existing takeaway capacity and widening the price spread between Permian gas markets and Henry Hub. However, the erosion in Permian gas basis has been anything but orderly. The current market is defined by significant swings in gas basis, depending on factors such as pipeline maintenance and weather. So, while the trend in Permian gas basis is decidedly lower, the path to get there is looking like a gut-wrenching roller coaster ride. Today, we look at recent swings in Permian natural gas basis pricing.

The Permian Basin has featured prominently in the RBN blogosphere over the last few weeks. Just last week, we were here discussing the basin’s latest infrastructure development in P.H.P., Dynamite!, a blog focusing on Kinder Morgan and EagleClaw Midstream’s proposed Permian Highway Pipeline. A few days before that, in Trouble Every Day, we outlined potential options for Permian natural gas should pipeline capacity out of the basin fill up before the first new pipeline — Kinder Morgan’s Gulf Coast Express (GCX) — starts up in late 2019. We most recently discussed the GCX project and other potential competing projects as part of our Blame It On Texas series. The last time we discussed prices and outflows in the Permian was our Omaha blog back in April, when we evaluated the dynamics behind increased gas outflows to the Midcontinent gas markets. Today, we dive into the recent volatility in basis pricing and some of the key drivers of the wild ride.

As shown in Figure 1 below, basis prices at the Permian Basin’s Waha Hub have been significantly weaker this year. Note that we calculate basis by taking the difference between Henry Hub and Waha as reported by our friends at Natural Gas Intelligence (NGI). So far this year, Waha has averaged just over 75 cents/MMBtu under Henry, which is a huge drop versus the same period last year, when Waha averaged about 25 cents under. Back in the lazy days of 2016, when pipeline takeaway capacity from the Permian was easy to come by, Waha averaged just over 10 cents/MMBtu under the benchmark (light-orange line). The basis widened and the market became a little more volatile in 2017 (medium-orange line), but since then all hell has broken loose. You’ll notice this year’s basis (brown line) has taken some wild swings, from pricing about 50 cents over Henry Hub during the coldest days of January before plummeting to multi-year lows of $1.40/MMBtu under Henry in April. The basis rallied in May and early June, before again diving back to the yearly lows in mid- and late June (red-dashed oval). While many in the market might have thought this was the end of the rallies in Waha daily pricing, basis again charged higher to start July. The wild ride in basis is being driven by a plethora of factors both within and outside of the Permian, throwing market participants for a loop from one week to the next. To better understand the workings of this perhaps nausea-inducing price action, we first turn our attention to markets west of the Permian.