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Don't Dream It's Over - Negative Permian Gas Prices, But Is the Worst Yet to Come?

Permian natural gas prices are having a rough spring. After a volatile winter that saw two periods of negative-priced trades followed by a period of relatively strong prices, values at the Permian’s major trading hubs hit the skids earlier this week just as Spring Break set in for most in the Lone Star state. Once again, pipeline maintenance and burgeoning production appear to be the main culprits, but this upheaval feels different, in our view. Clearly, the price crash has reached a new level of drama, with day-ahead spot prices at West Texas’s Waha hub now settling below zero — some days by more than $0.50/MMBtu. Gas production has raced higher too, now within striking distance of 10 Bcf/d, on the coattails of continued oil pipeline capacity expansions, but new gas pipeline takeaway capacity is an estimated six months away. What becomes of Permian gas prices in the meantime, and how much worse could already-negative prices get? Today, we discuss the drivers behind the latest price deterioration and assess what’s ahead for the Permian natural gas markets.

Back in the fall, we explained the latest Permian gas price swoon before it went away. First, outright prices in the basin dropped below $1.00/MMBtu in late September (green dashed circle in Figure 1), a situation we detailed in L.A. Freeway. At the time, the low prices appeared to be mostly driven by maintenance, particularly on the pipeline routes heading west and north out of the Permian. Then, in November, Permian prices dropped below zero in intraday trading for the first time ever while setting a new daily average low of $0.625/MMBtu. [Note that all the prices we reference today come from our good friends at Natural Gas Intelligence (NGI).] We discussed this second event (purple dashed circle in Figure 1) in Keep Breathin, where we suggested the price crash appeared to be driven by growing associated gas production as a new oil pipeline started up. (Subsequent to that blog, we heard that a potential intrastate pipeline limit might have occurred due to a pipeline breach and fire around the same time, but that remains only hearsay.) Negative prices returned in February (orange dashed circle in Figure 1), and we again detailed our view of the event, this time in King of Pain. While the market might have viewed that occurrence as a one-off — a major intrastate pipeline was widely known to be undergoing pigging operations — we suggested then that negative price events would likely become more frequent and severe. Turns out that view was prescient, as just last week the bottom really fell out for basin gas pricing (red dashed circle in Figure 1). The major West Texas gas trading hub at Waha experienced negative price trades on all five trading days last week. In a first, prices in trading for gas day Friday, March 22, settled below zero, at negative $0.015/MMBtu. Then it got worse, with Monday’s trades averaging a staggering $0.64/MMBtu below zero. Even the high for the day was negative — at minus $0.15/MMBtu.

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