Permian producers are struggling with negative gas prices

Article via Aegis Hedging

While Permian oil and gas producers are undoubtedly concerned about gas prices, their response to economic forces, particularly in the gas market, has been limited. Oil remains the dominant revenue stream in the Permian, leading operators to prioritize oil operations that create an abundance of associated natural gas. Waha Hub gas prices have suffered greatly in 2024 as gas production continually tests available output capacity.

Permian producers often find themselves in a constant race to expand supply capacity as supply growth strains existing output options, requiring new pipelines or expansions to handle production growth. The chart above illustrates historical Waha base prices alongside the forward curve.

While this static view provides some perspective, it does not capture the evolution of the curve over time, which is better represented in the seasonal bar graph below. For this, we can focus our attention on the chart below, which shows certain seasonal bands over time.

Note the continued decline in Waha futures prices, reflecting market expectations of persistent output challenges despite new pipeline additions. Since early 2024, forward bands have been trending lower in anticipation of continued outflow issues despite new inflow pipelines.

Returning to more price weakness in real time. With producers operating at the very edge of available capacity in the basin, Waha gas prices have frequently settled into negative territory for both the spot and cash month markets. The behavior of the Waha spot market below highlights how unfavorable pricing has been so far in 2024. At the time of writing, Waha spot prices have been negative on 109 of the 235 days (including weekend prices ) so far in 2024, accounting for a staggering 47% of the time!

It all boils down to deliverability versus supply. As we sit here today, Permian-shaped supply is straining daily takeaway capacity. The chart below shows that help is on the way in the near term in the form of the 2.5 Bcf/d Matterhorn pipeline (stacked brown area). This large unbroken pipe provides the much-needed relief that causes such acute weakness in Waha.

Opinions differ on how quickly the Matterhorn pipeline will reach capacity, with some suggesting it could be filled by next spring. This capacity will not necessarily handle all new gas; instead, existing supply can be redirected from less desirable corridors such as West Texas to the Midcontinent. The extent of “new” gas entering the market in the next three to six months after the Matterhorn will be crucial.

Although the Matterhorn Pipeline offers some relief, it may be short-lived. There is still significant weakness in the Waha forward curve for Cal 2025 and Cal 2026. The front of the curve at near -$3.00/MMBtu is in line with our previous discussion, but the declines from around -$1.25 to -1 $.29 for Cal 2025 and Cal 2026 raise questions. A weak Cal 2026 is understandable given that the next major pipeline isn’t due until late 2026, WhiteWater’s Blackcomb pipeline. However, the decline in Cal 2025 could suggest that serious weakness in 2024 is dragging it down, or traders are very bullish on Permian supply, expecting it to fill sooner rather than later. Either way, Permian gas prices face an uphill battle unless oil prices change significantly.

The current forward curve suggests that Waha gas prices are likely to remain volatile and weak, reflecting the ongoing challenge of balancing production growth with infrastructure development in the Permian Basin.

By Jay Stevens via Aegis Hedging

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