Play It Again - Permian Natural Gas Markets Singing a Familiar Tune as Constraints Loom

Some things you can pretty much count on this time of year, like the end of 100-degree days in Houston, Aggies rooting against Longhorns, and the Astros in the World Series. Permian natural gas production has also been consistently higher the last few years. It’s usually on its way to new highs as we approach the holidays and 2021 is another fine example. After a bang-up 2020, this year has been one of continuously solid gas production growth in the Permian, with gas volumes currently sitting near 14 Bcf/d, up around 1.5 Bcf/d versus this time last year. What’s more, at today’s crude oil prices, which encourage increasing production of oil and associated gas, there is no end in sight for Permian gas growth. Which means, as many gas traders already know, that the Permian’s primary gas market, the Waha Hub, may soon be headed back into the familiar territory of deep basis discounts. In today’s RBN blog, we look at the latest developments in Permian gas markets.

If you follow RBN’s blogs — or, better yet, subscribe to our weekly NATGAS Permian report — you know we are big fans of the Permian gas markets, and all too happy to write about the topic. Lately, these markets have been relatively quiet. Sure, there was the impact of Winter Storm Uri last winter, which followed on the various negative-price events and production shut-ins that accompanied the COVID-19 pandemic, but things lately have been relatively chill. Natural gas prices in the Permian have been rising, like those in much of the U.S., and the basin has benefited from the buildout of new gas pipeline takeaway and gas processing capacity. Those events, along with soaring crude oil prices, have Permian natural gas production growth surging once again.

Figure 1 below shows Permian natural gas production since the start of 2018. If you are a longtime follower of the Permian, this will be old news to you, but gas production in the basin was on a tear during 2018 and 2019. This period was the final couple of years of a phenomenon that some called “Permania” — a rush to West Texas and southeastern New Mexico that saw activity in the Permian hit frenetic levels. Though some may argue that Permania was already being reined in by Wall Street before the pandemic hit in early 2020, last year’s wild ride certainly coincided with the end of unbridled spending in the Permian. Last year also saw the dramatic plunge of crude oil prices into negative territory, followed by a brief-but-painful period during which Permian producers actually shut-in crude oil and natural gas production in the basin for a few months last summer. Fortunately, that period ended relatively quickly and Permian gas production was growing again by late last year, which we detailed in our 2021 Permian Oil and Natural Gas Markets Outlook blog back in January. Although Winter Storm Uri came along soon thereafter, its impact was fleeting and Permian gas production has charged higher ever since, currently sitting right at 14 Bcf/d (right end of solid purple line).