King of Pain - Waha Price Collapse Signals Worsening Gas Supply Glut in the Permian

The U.S. natural gas market last week was again reminded of the hair-trigger conditions that Permian producers and marketers are operating under — with gas production pushing against available takeaway capacity, all it takes is an otherwise minor/routine maintenance event on even one West Texas takeaway pipeline to send regional gas prices spiraling into negative territory. Waha Hub gas prices last week collapsed to their lowest level ever, with intraday trades even going negative — meaning some had to pay the market to take their gas. This wasn’t the first time that’s happened in the Permian — a similar event occurred in late November 2018 — but it was the worst to date and signals a heightened supply glut in the region, at least until the first new takeaway pipeline comes online in the fourth quarter of this year. Today, we explain the recent price weakness in West Texas and implications for Permian basis in 2019.

Gas market participants have long been bracing for mayhem in the West Texas physical market. We’ve written extensively in the RBN blogosphere over the past couple of years about the onslaught of gas supply from the basin, the rapidly worsening takeaway capacity constraints and the resulting deterioration of Permian gas prices. (These are trends we update on a weekly basis in our NATGAS Permian report, along with our outlook.) A little over a year ago, in Help On the Way, and again later last year in Blame It On Texas and Hell in Texas, we laid out the timing and extent of pipeline constraints that the region was facing, along with the slew of pipeline projects announced to provide a relief valve for gas leaving the region. And, finally, our Trouble Every Day series outlined potential ways that Permian producers could ride out the constraints until that capacity relief arrives.

We’ve subsequently also written about the constraint-driven price volatility that’s gripped the Permian market over the past couple of years. Basis (the regional price relative to national benchmark Henry Hub) at the West Texas gas benchmark Waha Hub — comprising interconnects with four major interstate pipelines and nine Texas intrastate pipelines — was already under pressure in late 2017, trading nearly 60 cents/MMBtu below Henry at one point in October 2017 (light orange line in Figure 1) as Permian production topped 7 Bcf/d and legacy Permian-to-Gulf Coast pipelines were filling up (see Witchy Waha). It only got worse from there. In the first half of 2018 (medium orange line), Waha gas basis swung wildly from 50 cents above Henry in January to nearly $1.50/MMBtu below (see Waha Rollercoaster). And, in September 2018, with production topping 9 Bcf/d and just about every takeaway pipe running near capacity, Waha outright prices fell below the $1.00/MMBtu mark for the first time in recent history (basis widened to about $2.50/MMBtu; dashed blue oval), as storage constraints in Southern California further limited westbound flows from the basin (see L.A. Freeway). Then the bottom really fell out.