Hold on Loosely - Waha Natgas Market Is Going Premium, But It May Be Short-Lived

A lot of people know that Permian natural gas prices have spent many days in negative territory over the last few years, only to skyrocket over $100/MMBtu during the Deep Freeze in February. Those events were mostly viewed as transitory, driven by a chronic lack of pipeline capacity in the former case and a crazy round of arctic weather in the latter. It may come as a surprise to hear that forward basis prices for natural gas in the Permian are trading at a premium to Henry Hub for at least some months over the next year or so. How could it be that gas from a supply basin way out in West Texas, where gas is considered a byproduct, trades at a premium? The answer lies in the key infrastructure changes expected in the weeks ahead and a premium in forward basis for the Houston Ship Channel gas market. How long the Texas premiums will last depends on Permian gas production, which is starting to take off again. Today, we aim to explain the latest developments in Permian and Texas natural gas markets.

If you follow RBN, you’ll know that we watch Permian energy markets like a hawk, particularly when it comes to natural gas in West Texas. We frequently write on the subject, such us our latest blog on new natural gas storage being developed at the Waha Hub, the Permian’s primary gas market. There’s also our weekly report on Permian gas fundamentals, the NATGAS Permian, which covers even minute details of gas supply in the Midland area. It’s fair to say that we are big fans of Permian gas and are always looking to bring our readers the latest interesting developments in the basin. Today’s topic is a new one since we’ve been covering the Permian in detail over the last four years, as forward Waha basis is now trading at a premium to Henry Hub, at least for some months along the curve. Yes, you heard that right. The futures market is now showing that natural gas way out in West Texas and southeastern New Mexico may be priced higher than in southern Louisiana. Actually, we discussed some of the factors we thought would be improving Permian basis in our Some Beach market study last fall. More on that later. First let’s look at what’s happening at Waha.

Figure 1 below shows the Waha basis forward curve starting with the current prompt month, June 2021, and running through December 2022. There’s a lot going on with this curve (red line), but we want to point out some highlights. You can see there are four months on the curve that are priced over Henry Hub (gray dots) — August 2021 currently sits a couple of pennies over Henry, while December 2021 through February 2022 are at a premium of about a nickel. So, what’s the big deal, you might ask, especially if you follow a market trading at massive premiums to Henry Hub, such as the ones supplying Southern California this summer. Well, for the Permian, even a small premium to Henry is notable. Excluding the insanely high February prices, which were driven by the Deep Freeze, Waha gas hasn’t come close to trading at a premium to Henry for a month at any point in the last five years, according to data from Natural Gas Intelligence (NGI). That means Waha has been discounted to Henry Hub all those months, and sometimes those discounts have been in dollars, not mere pennies. As a result, the premium for Waha gas is not something marketers are accustomed to, though we don’t think producers are complaining. However, you can see that as the curve progresses into 2022, the premium starts to fade. We’ll explain that soon, but in order to understand everything that is going on here, we need to first turn our attention to another primary gas hub in Texas, the Houston Ship Channel.

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