US West gas prices whiplash again, contributing to historic shifts in regional flows

Natural gas prices in the US West have seesawed again this week despite relatively stable demand, with weak storage levels and constraints on supply from connecting regions both factoring into another spike above $25/MMBtu at key hubs, as well as historic flows into the region.

Spot gas prices at PG&E city-gate increased by more than $7 to reach $26.455/MMBtu in Jan. 12 trading for Jan. 13 flows, according to data from S&P Global Commodity Insights. This marked the first time this month that prices at the key hub in northern California have broken above the $25/MMBtu mark, after prices spent much of December 2022 above that threshold, including a peak above $57/MMBtu on Dec. 22. Further south, prices at SoCalGas city-gate also soared by nearly $7 on Jan. 12, to $25/MMBtu, also a month-to-date high.

The surge, which may have been partly influenced by signs of relatively thin storage levels in the western US region, was short-lived: prices at both PG&E city-gate and SoCalGas city-gate reversed all those gains and then some in Jan. 13 trading for flows across the Martin Luther King Jr. Day holiday weekend, falling back to $16.19/MMBtu and $17.56/MMBtu, respectively, according to preliminary settlement data from S&P Global.

This recent stretch of volatility speaks in part to those tight inventory balances that have plagued western US gas markets this winter, as well as going maintenance on the south-bound L2000 segment of Kinder Morgan's El Paso Natural Gas pipeline.

"The market continues to be wary of weak storage levels and the ongoing dependence on supply from connecting regions," S&P Global analysts Eric Brooks and Felix Clevenger wrote in a market Spotlight Jan. 13. "There is only so much gas that can reach the West from the Permian -- around 3.3 Bcf/d with the ongoing outage on El Paso L2000 constraining possibly flows by 600 MMcf/d."

Supply outlook

Signs of plateauing gas production in the Permian Basin of Texas and New Mexico could contribute to even more volatility in West Coast gas markets coming months. US energy consultancy East Daley Analytics this week revised its Permian Basin gas supply forecast for 2023 lower by 300 MMcf/d, citing lower rig expectations in the Permian after a recent slide in oil and gas prices.

Plateauing Permian production would likely be unwelcome news for the US Southwest, which is already doing everything it can to incentivize Permian gas westward: S&P Global forecasts the Southwest, which includes California, will receive 2.678 Bcf/d in gas flows from Texas alone this month -- potentially an all-time high for any month according to data stretching back to 2005.

But production from closer-at-hand pads seems unable to respond to recent high price signals in the West. Production in the Rockies' Denver Julesburg basin has averaged roughly 2.24 Bcf/d thus far in January, down slightly from the 2.3 Bcf/d average recorded in the same month a year ago, when spot gas prices at key hubs in the West were down in the $3-$7/MMBtu range. That weak response by producers in the DJ Basin could contribute to unusually tight supply between the Rockies and demand centers in the West this year: latest forecasts from S&P Global project net Rockies gas outflows for January 2023 at just 3.845 Bcf/d, potentially marking the weakest outflows ever recorded for any month.

Without more gas from the Permian or Rockies, the US West could remain highly reliant on gas from Canada in coming months. S&P Global historic data shows gas flows from Canada into the US West reached an all-time high of 4.185 Bcf/d on Jan. 12, highlighted by near-record flows of 2.825 Bcf/d through the Kingsgate hub near the border of Canada and northern Idaho. Overall, S&P Global forecasts an average of 3.76 Bcf/d of gas will flow from Western Canada into the Pacific Northwest across 2023, potentially an all-time annual high.