While fall and early winter saw sustained unseasonably mild temperatures throughout most of the country, the New Year brought bitterly cold weather to many regions – sharply increasing demand and potentially impacting production. In particular, the Permian Basin was hit hard by the cold snap, with daily low temperatures in the Midland, TX, area dropping to as low as 15 degrees Fahrenheit on January 2. Temperatures this low have historically caused freeze off issues in the Permian, and this event turns out to be no exception.
Indeed, the January 2 cold weather event saw modeled Permian production fall more than 9% from the levels seen in the previous week, recovering slowly over the next 7 days. In fact, the data shows an additional, although much smaller, drop in modeled daily production on January 7 when the low temperature again dropped to 18 degrees Fahrenheit.
A similar pattern is also evident in the Waha Basis pricing over the same period.
While the impact is not as immediate as that seen on modeled production, Waha basis pricing also shows a clear response to the cold weather event. Basis begins to tighten on January 2nd, eventually trading at near parity (within $0.03/MMBtu) to Henry Hub on January 6th, before returning to recent historical levels as warmer temperatures returned to the Permian region.
In terms of length and severity, this freeze off event was relatively minor. While the hard freeze impacted production, extremely low temperatures were not sustained over a long period and modeled production levels have recovered after significant, but not catastrophic, declines. Similarly, while Waha basis tightened to levels not seen in the last several months, blow out pricing did not materialize and expected pricing levels returned within a week. However, the immediate and clear impact of unusually cold temperatures on both production and basis pricing highlights the fact that the Permian remains vulnerable to disruption from even a very short cold snap. Given that Permian dry gas production is 15.6 Bcf/d and accounts for 16% of Lower 48 production, this vulnerability represents a significant risk to supplies in the Western US and beyond as was evidenced not only last February, but also in years past. For more information on BTU Analytics’ outlook for Permian production and gas prices request a sample of our Upstream Outlook and Gas Basis Outlook reports.