Permian spot gas prices test record low as maintenance limits midstream capacity

Denver — Spot natural gas prices in West Texas tumbled to levels below minus $7/MMBtu in early trading Monday as pipeline maintenance was expected to cut into the Permian Basin's production takeaway capacity.

After approaching record-low territory, cash prices at the Waha Hub ended Monday at minus $5.06/MMBtu, the second lowest settlement price on record, preliminary data from S&P Global Platts shows.

Waha gas prices previously traded lower on April 4, 2019, when the index reached minus $7.67/MMBtu, and settled at minus $5.79/MMBtu, according to Platts data.

The sharp decline in prices comes ahead of the start of scheduled maintenance on El Paso Natural Gas' system Tuesday that will cut throughput capacity at the Cornudas compressor station by nearly 360 MMcf/d.

In a notice updated Monday, El Paso said work would continue through April 30, limiting capacity on the station's low- and high-pressure lines to a combined 1.32 Bcf/d, down from 1.67 Bcf/d.

With flows through Cornudas averaging nearly 1.5 Bcf/d so far in April, the restriction is expected to push back roughly 150 MMcf/d in Permian supply, according to S&P Global Platts Analytics.

El Paso's late-April maintenance comes as local demand for gas around the Permian wanes, amid milder shoulder-season weather.

In April, interstate pipeline deliveries to the West Texas market have averaged just 600 MMcf/d, down from over 760 MMcf/d in March and an average 860 MMcf/d during the peak demand month of January. Intrastate pipelines, which are not required to publicly report transmission volumes, likely delivery another 200 MMcf/d or so in Permian gas supply to local markets.

Monday's steep decline in prices could also potentially be related to undisclosed maintenance or restrictions on local or longer-haul intrastate pipelines delivering to markets in East Texas, according to Platts Analytics.

VOLATILITY

Despite Monday's price volatility, there are growing signs that Permian producers' midstream capacity woes could ease in the weeks and months ahead as recently announced cuts to oil drilling and production slow or potentially reverse recent growth in associated gas production.

On the NYMEX Monday, futures prices for West Texas Intermediate crude fell into negative territory in a historic move for the market that comes as storage inventories approach capacity.

According to a recent analysis from IHS Markit, cuts to Permian oil drilling and production this year could see crude output from West Texas fall some 3 million b/d by late 2021 – enough to push West Texas gas production below 10 Bcf/d.

In February, prior to the recently announced cuts to drilling activity, Permian Basin gas production averaged nearly 11.9 Bcf/d. Month to date, production is now averaging just under 11.5 Bcf/d, Platts Analytics data shows.

In further evidence of a slowdown, gas flaring in the Permian Basin witnessed a steep drop in March compared to the month prior, VIIRS open-source data shows. In both the Midland and Delaware Basins, the number of satellite-detected flares was down by roughly 30% compared to February.

Reduced flaring suggests that fewer completed wells were turned to production in March – a trend that is likely to accelerate as more producers opt to leave crude oil and associated gas volumes in the ground.