Permian natural gas production recently topped 7 Bcf/d and shows no signs of slowing its growth trajectory. While new pipelines are expected to move additional Permian gas volumes to the Gulf Coast markets by the beginning of 2020, the current paths to those markets are full. Over time, Mexico is expected to export significant volumes directly from Waha, but current amounts are relatively small. As a result, increasing volumes of gas are leaving the Permian on the pipelines that head west to California and north to the Midcontinent. However, the pricing in these markets is downright ghoulish compared to the Gulf Coast and Permian gas is increasingly finding itself in scary market conditions. Today, we analyze recent pricing and flow trends in the Permian natural gas market.
Permian natural gas has been a frequent subject in the RBN blogosphere in 2017. This summer we posted a four-part blog series on Waha in which we outlined our view that Permian gas production is set to grow to almost 9 Bcf/d by the end of 2019 and create gas takeaway constraints in the process. Nothing has changed from that general view, but with a few months of time having passed, we thought we’d check in on Permian gas to see how things are playing out.
Waha Pricing and Permian Natural Gas Production
As you might have guessed from today’s title, prices for natural gas in the Permian remain under pressure. We often measure the relative strength or weakness of a particular basin by looking at the spread between local prices and the Henry Hub benchmark. That spread for Waha is shown in Figure 1, with the dark orange line representing the Waha-Henry spread in $/MMBtu for 2017 and the light orange line representing this spread for 2016. A few things stand out. First, the spread, often referred to as the basis for Waha, has been consistently more negative this year, meaning Waha has been pricing further under the Henry Hub price in 2017 than in 2016 — on average, Waha has averaged a daily price of 27 cents/MMBtu below Henry this year. We arrived at that price by averaging the daily cash price for Waha and Henry Hub using data published by our friends at Natural Gas Intelligence (NGI). Over the same period in 2016, Waha averaged just 14 cents under Henry Hub. Recent pricing has been particularly weak at times, with Waha basis trading as much as 50 cents under Henry earlier this month (October 2017).