Old Ocean

Permian natural gas markets felt a cold shiver this week, but not a meteorologically induced one of the types running through other regional markets. Gas marketers braced as prices for Permian natural gas skidded toward a new threshold: zero! That’s not basis, but absolute price, a long-anticipated possibility that became reality on Monday. The cause is very likely driven, in our view, by continued associated gas production growth poured into a region that won’t see new greenfield pipeline capacity for at least 10 months. What happens next isn’t clear, but expect Permian gas market participants to be a little excitable or jittery over the next few months. Today, we review this latest complication for Permian natural gas markets.

It’s no secret by now that Permian natural gas pipelines have been running near full the last few months, jam-packed like Southern California traffic while trying to whisk away copious volumes of mostly associated natural gas to markets north, south, west and east of the basin. Despite every major artery running near capacity this summer, Permian prices had so far managed to avoid falling below the dreaded $1.00/MMBtu threshold, a precipice that historically defines a gas producing basin as definitively oversupplied. That all changed yesterday, as word came in that Southern California Gas Company, one of the largest recipients of Permian gas, has nearly filled its gas storage caverns and will soon need far less gas hitting its borders. That’s particularly bad news for the Permian, which has few other options if it needs to reduce the supply that is currently flowing west out of the basin to California. A large unplanned outage for maintenance was also announced on one of the pipelines leaving the Permian and heading north to the Midcontinent. As a result, the SoCalGas news and maintenance combined to put a huge dent in Permian gas prices, some of which plunged as low as 50 cents in Wednesday’s trading. Today, we detail this most recent development and the implications for Permian gas takeaway.