Pipeline restrictions, lower demand push Waha Hub spot gas to six-month low

The cash price at the Permian spot gas benchmark Waha Hub sank to a six-month low in Dec. 23 trading, as additional pipeline capacity restrictions limit outflows and a forecast for record-high temperatures in West Texas reduces expectations for local gas demand for heating.

Waha Hub cash fell 84 cents to $2.535/MMBtu in Dec. 23 trading for Dec. 24-27 flows, according to Platts preliminary settlement data, which will be its lowest price since June 7 if it holds to final settlement. The decline widened Waha Hub's discount to cash Henry Hub to 98 cents from 61 cents Dec. 22.

While US Southwest spot gas prices fell across the board Dec. 23, Waha Hub and nearby Permian pricing locations have seen spreads to pricing locations further west blow out in recent days.

Platts preliminary settlement data shows that Waha Hub's spread to Transwestern Pipeline-San Juan blew out to a discount of $3.515 Dec. 23, out from around $1.60 a week prior and 13 cents at the start of the month. Similarly, Waha's spread to the El Paso Natural Gas South Mainline reached a discount of $4.035 in Dec. 23 trading, down from $2.35 Dec. 16 and 61 cents Dec. 1.

El Paso-Permian and Transwestern-Permian tracked Waha Hub, also falling below $3/MMBtu Dec. 23.

Pipeline capacity restrictions

Potentially the largest driver of the pricing disconnect is pipeline flow constraints between West Texas and major gas demand centers further west.

El Paso declared a force majeure Dec. 22 at the Dilkon "B" Compressor Station, after the unit experienced equipment failure. Operational capacity through El Paso's North Mainline was reduced by an additional 92 MMcf/d, effective Dec. 23 until further notice. The pipeline's updated December maintenance schedule shows that capacity through the North Mainline will be reduced by 180 MMcf/d Dec. 23-26, then by 208 MMcf Dec. 27.

Other branches of El Paso's pipeline system that sent gas west are also experiencing constraints, most notably Line 2000, which remains offline following a mid-August pipeline rupture. As a result, EPNG's electronic bulletin board showed that capacity through several major segments had been either nearly or fully booked for timely nominations Dec. 23, including CORN LPW, LORDS B, and CASAG HP.

Weaker demand

The impact of pipeline restraints has been exacerbated by robust Permian production and expectations of lower demand, both locally and for exports south to Mexico.

The National Weather Service forecast that West Texas will see unseasonably warm weather the near term, reducing the potential for local heating demand to soak up additional supply.

Midland, Texas, was forecast to see highs in the upper 70s and low 80s Fahrenheit Dec. 24-27, which could surpass the highest temperatures on record for this time of year, according to annual records dating back to 1931. Lows through the upcoming holiday weekend were forecast to remain the 50s F.

Midland normally sees highs in the upper 50s F and lows in the lower 30s F, weather service data showed.

Gas demand in Mexico typically falls during the Christmas and New Year holidays, which could also be supportive of lower Permian prices. During the last three winter holiday seasons, US gas exports to Mexico fell 14-20% Dec. 24-Jan. 2, compared with prior 30-day averages.

Outlook

Although Waha Hub's January and February contracts traded lower on the Intercontinental Exchange Dec. 23, both contracts were trading at a premium to Henry Hub, suggesting market expectations for higher Waha pricing.

ICE futures also showed that wide spreads between Waha and other more western locations like El Paso- San Juan are expected to continue into January. The El Paso-San Juan January contract was trading at a $1.81 premium to Henry Hub as of the morning of Dec. 23, compared with Waha January's 22-cent premium.