Southern California natural gas market's unusual discount status continues

Natural gas cash prices in Southern California have been below Henry Hub for much of August, and the forwards market is pricing in a rare basis discount continuing through October amid strong storage inventories and gas production in the Western US.

The SoCal Gas city-gate cash price has been below Henry Hub throughout Aug. 10-28, averaging a 28 cents/MMBtu discount in this period, Platts data showed. Platts is part of S&P Global Commodity Insights.

Earlier in the summer, it went on an extended stretch below Henry Hub, with the basis discount averaging 64 cents/MMBtu in May and 70 cents in July. Throughout 2024 the basis discount has averaged just 24 cents/MMBtu.

This is unusual for what is a typically premium pricing point. It had an average premium of over $4/MMBtu to Henry Hub in 2023 and roughly averaged a $3/MMBtu premium in both 2021 and 2022.

Looking ahead, the September and October forward contracts for SoCal Gas city-gate were both at a basis discount of 13 cents/MMBtu on Aug. 27, Platts M2MS data showed.

Storage

High inventories have been weighing on prices in California this summer, particularly in the south thanks to the extra available capacity at Aliso Canyon.

On Aug. 28, total supply on the SoCalGas system was over 107 Bcf, its highest level since 2015, Commodity Insights data showed Aug. 28. This compares with 79 Bcf at the end of August 2023.

In August 2023, the California Public Utilities Commission voted unanimously to expand storage capacity at Aliso Canyon to 68.6 Bcf, a more than 65% increase from the earlier expansion to 41.16 Bcf in November 2021. The site previously had a capacity of 86 Bcf, but this was reduced drastically after a 2015 methane leak.

Total Pacific region inventories were 288 Bcf as of Aug. 16, around 20% higher year over year and 10% higher than the five-year average, according to EIA data.

Inventories are also exceptionally high in the EIA's Mountain region. There was around 263 Bcf in storage as of Aug. 16, the highest since at least 2010 despite only being in the middle of injection season, according to EIA data.

Production

While the US has seen some production cuts this summer, these have chiefly come from dry gas producers in Appalachia and the Haynesville Shale, while production has held up in further west in the Permian Basin and the Rockies.

Production in the Western US region has averaged 9 Bcf/d so far this summer, around 900 MMcf/d higher year over year thanks to strong output in New Mexico, Commodity Insights data showed. Production has held up despite deeply negative prices in Permian hubs like Waha and El Paso Permian, and has even picked up further to 9.2 Bcf/d in August, the data showed.

Production in the Rocky Mountain region has averaged 7.9 Bcf/d this summer, around 200 MMcf/d higher year on year.