The market’s spotlight in recent days has been on negative prices for both Permian crude oil and natural gas, but in the shadows a powerful rally has taken place in the forward market for Permian gas at the Waha hub. Much of this month’s price weakness for gas in West Texas has been driven by pipeline maintenance. But the Waha forward curve indicates market expectations for higher prices in May, and the possibility of a summer in which Permian gas prices could be some of the strongest on a consistent basis since negative pricing first appeared in the basin back in 2018. Today, we dive into the drivers behind the rise in forward Permian gas prices.
It’s been even more challenging than usual lately to get a handle on crude oil and natural gas markets, as there have been huge differences between spot — or physical — prices traded on a daily basis, and futures prices for delivery of crude or gas months or even years from now. Last week, we discussed some of the reasons why these dislocations occur, first in One Way Out, where we detailed our view of the unprecedented negative prices that materialized in the crude oil market. Then, in Future(s) Games, we focused on crude oil pricing mechanisms, and in It’s Always Somethin’, we zeroed in on the recent trend in spot prices for both Permian crude oil and natural gas. While we didn’t devote a full blog to explaining the differences between daily natural gas spot and futures prices in the Permian, the mechanisms are not that different from crude oil. While producers can develop numerous arrangements under which to sell their natural gas, the arrangements usually involve a combination of selling physical gas each day of the month in the daily market for next-day flow, and selling for the month-ahead at a monthly price set during the last five trading days of the previous month’s trading, a period known as bidweek.
In addition to the daily and monthly physical trading, there are also financially settled futures contracts for the major regional trading hubs, referred to as “forwards” or “forward basis,” given that they are priced as a basis differential to the national benchmark Henry Hub. Note that in today’s blog we will use the terms futures and forward prices interchangeably. Forwards prices reflect the market’s current expectation of where physical prices will eventually trade at some point down the road and can be used to hedge physical volumes. If you want to dive further into the details of the physical and forwards gas markets, you might want to reference our blog from a few years back, Living In Fast Forward Curves. The most important thing to remember is that, as with crude oil, daily prices for natural gas eventually converge with bidweek and front-month futures prices.
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