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Will Waha Forward Premiums Come to Fruition This Summer?

The forward curve for Waha is currently trading at a premium to Henry Hub starting in July. Waha maintains a slight premium to Henry Hub on average through February. Premium forward markets for Waha are a far cry from two summers ago when Waha natural gas prices traded negative The driver for the expectations for a premium market this summer is the arrival of the 2.0 Bcf/d Whistler pipeline. Whistler will add additional takeaway capacity between Waha and South Texas at a time when Permian natural gas production is still recovering. Today’s energy market insight will explore how long this premium may last and the potential downstream implications for other US basis markets.

Cash markets for Waha in April and May have weakened as mild temperatures combined with slightly growing production have tempered basis in the region. Waha averaged a $0.19 discount to Henry in April and so far in May has averaged a $0.28 discount to Henry Hub. The chart below shows natural gas flows by corridor out of the Permian to downstream markets.

Basis prices weakening has coincided with Eastbound flows out of the Permian returning to capacity as seen on the bottom right chart above. High utilization of this corridor has put downward pressure on Waha. Flows east have filled at the expense of volumes moving North out of the Permian to the Midcontinent on NNG, NGPL, and ONEOK West Texas. While Eastbound volumes have grown at the expense of Northbound, Westbound volumes have remained at or near capacity to flow towards SoCal City Gate which have maintained $0.33 premium to Henry Hub in May.

The start up of Whistler, likely in July, is expected to increase the competition for the marginal molecule out of the Permian. Whistler will add 2.0 Bcf/d of capacity East from the Permian to the South Texas market, which has also been trading at a slight premium to Henry Hub in May. All else equal, the start up of the pipeline would be expected to steal volumes from other routes out of the Permian. First and foremost, volumes flowing North into the Midcontinent are the first at risk of being redirected into Whistler pipeline.

If Whistler steals all the volumes flowing north in May upon startup, then Whistler would only be flowing at approximately 33% utilization. This would leave another 1.3 Bcf/d of open capacity on the pipeline to either serve growing production volumes or to take volumes away from other Eastbound corridor pipelines. This competition for volumes is leading to the expectation of materially higher Waha basis prices starting in July and continuing until next spring. Given the high premiums paid by California consumers for natural gas, it is unlikely that Westbound volumes will be diverted to Whistler. Additionally, volumes flowing to Mexico have no substitutes for Permian molecules.

So how long can Permian premiums last? The chart below shows BTU Analytics’ estimates of natural gas production growth at current rig counts in the Permian basin versus Permian takeaway capacity.

As shown in the chart above, Permian natural gas production would not grow at current rig counts through 2022 leaving the basin with open natural gas pipeline capacity for an extended period of time.

However, rig counts have been increasing each week in the Permian since September of 2020. With oil prices holding steady over $60/bbl, rig count increases are likely to persist through the end of the year. As rig counts gain, the pressure on Waha will mount and those premiums will likely come under pressure. For BTU Analytics’ latest robust outlook on natural gas basis markets, check out the newest edition of our Gas Basis Outlook publishing Friday.

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Anthony (Tony) Scott has built an in depth understanding of the North American energy market by providing investment advisory services and leading teams of analysts focused on the North American energy complex. Mr. Scott has conducted hundreds of consulting engagements assisting producers, marketers, midstream, refiners and private equity understand how rapidly changing natural gas, natural gas liquids, and crude oil markets in North America would impact their assets.

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