Texas heatwave fuels stronger gas burns, narrower spreads at Waha

Blistering temperatures across Texas are fueling a surge in natural gas-fired power burns in the state as rising demand for Permian Basin gas production helps to fuel tighter basis spreads at Waha.

Over the past week, temperatures across central Texas have climbed to the upper-90s Fahrenheit with some locations facing triple-digit highs. On June 16, the National Weather Service issued an excessive heat warning enveloping over a dozen counties in the region. The warning remains in effect through June 21 as San Antonio, Austin and other cities grapple with high temperatures well over 100 degrees.

While renewable power generation from wind and solar continues to capture much of the peak power demand in The Electric Reliability Council of Texas, demand for gas-fired cooling is also up. Over the past week, Texas power burns have averaged a robust 7 Bcf/d, about 1 Bcf/d above the prior three-year average and a new record high for late June, data from S&P Global Commodity Insights showed.

In the week ahead, sweltering triple-digit heat is forecast to continue across Texas, likely keeping gas-fired power demand elevated. According to a forecast from S&P Global, Texas power burn should continue to trend at close to 7 Bcf/d through June 27, well above the historical average at just 6 Bcf/d.

Demand

In June, total gas demand across Texas has averaged a record-high 19 Bcf/d, outpacing the prior June-to-date demand record for the Lone Star State at an average 17.1 Bcf/d, set in June 2021.

Strong LNG feedgas flows and record power burns have been the primary drivers for higher demand in Texas this June. Incrementally higher local demand around the Permian Basin and strong outflows appear to be lending support spot gas prices at Waha, which have been on the rise vis-à-vis Henry Hub.

Over the past week, the basis discount at Waha has narrowed significantly with the benchmark West Texas location trading just 25 cents behind the Henry Hub, S&P Global data showed.

As sweltering conditions across Texas persist, stronger demand for Permian production could keep cash basis prices at Waha elevated, at least over the short term. In the forward market, at least, traders remain skeptical that West Texas gas prices will stay tightly tethered to the Henry Hub. In recent trading, balance-of-month forwards at Waha have continued to trend about 50 cents behind the benchmark. For July and August, forwards prices are even weaker – trading about 55-65 cents behind Henry Hub.

Weaker forward gas prices could reflect persistent concerns over midstream constraints around the Permian Basin. In the second quarter, sliding gas production in West Texas has helped to ease congestion on outbound transmission corridors, simultaneously giving gas prices a boost. In June, gas production is averaging about 17 Bcf/d, down sharply from a record monthly averaged at 17.6 Bcf/d in March, data from S&P Global shows.