Permian producers hit the brakes on output as negative prices linger

Permian Basin natural gas producers are dialing back output in late March as falling shoulder-season demand and pipeline maintenance continue to fuel price volatility at West Texas hubs.

Over the past week, gas production from the Permian Basin has retreated to an average 21.8 Bcf/d which is down about 1 Bcf/d from highs recorded in early March. As recently as early February, Permian production hit highs around 23 Bcf/d and in early January, output there set a single-day record high at over 23.5 Bcf/d, data compiled by S&P Global Commodity Insights showed.

Although gas production in the Permian Basin typically retreats into the spring as seasonal demand wanes, the timing of recent price volatility appears to be a key driver behind the late March decline.

Over the past month, gas prices at the West Texas Waha Hub have been in steady decline after reaching a late-February high around $4, triggered by a historic late-winter blast of arctic weather. Earlier this month, though, prices dipped below $1 and in mid-March dipped into negative territory, according to data from Platts, part of Commodity Insights.

On March 26, cash prices at Waha were moving around minus-4.5 cents, up from minus-22.5 cents in prior-day trading, data from Platts and Intercontinental Exchange showed.

Demand, maintenance

In late March, Texas gas demand has retreated to around 10.7 Bcf/d, which is down from an average 13.5 Bcf/d in second-half February. Potentially more pertinent is the recent drop in gas demand across the Western US – a key end-user market for Permian supply. On March 26, western gas demand was estimated at just 8 Bcf/d – down from levels closer to 10 Bcf/d just one week ago.

As seasonal gas demand wanes, pipeline maintenance season has also begun ramping up.

On El Paso Natural Gas, maintenance on the North Mainline was scheduled to restrict capacity by nearly 450 MMcf/d from March 24-26. Over the balance of March, the restriction was scheduled to ease to around 130 MMfcf/d according to an updated maintenance schedule published March 24.

By early April, another 385 MMcf/d capacity restriction is expected on El Paso's North Mainline. Additionally, more maintenance is now scheduled on Gulf Coast Express Pipeline, April 8-15 and on Permian Highway Pipeline, April 22-25, according to pipeline operator Kinder Morgan.

For Permian gas producers, the busy maintenance schedule, in combination with low shoulder-season demand, promises more price volatility ahead. In the forward gas market, traders are already pricing in volatility through late spring with the balmo, April and May gas contracts at Waha all currently priced in negative territory.