East Texas basis markets crumble as flood of Permian Basin gas moves east

highlights

Katy, Houston Ship Channel Trade discounted at $1.50/MMBtu

Production in the Permian at 15.2 Bcf/day in September

Eastbound implicit transmission at 94% to 95% capacity

Cheap gas from the Permian Basin puts pressure on the East Texas market in September as record production in West Texas forces more eastbound shipments and tests the capacity of recently added domestic pipelines.

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In recent trading, base prices on Katy Hub and Houston Ship Channel fell to settle at a discount of nearly $1.50/MMBtu to benchmark Henry Hub for the week ended September 23 – down from an average discount, which was closer to around 60 cents/MMBtu, August data from S&P Global Commodity Insights shows.

The price dislocation in east Texas comes as Waha’s underlying market hits lows not seen in almost two years. For the past week, cash prices there have traded around $2.90/MMBtu behind Henry Hub, marking a sharp decline since August when the site traded at an average discount of just $1.22/MMBtu.

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The sharp decline in gas prices in West and East Texas is due to a recent increase in production in the Permian Basin and a concomitant increase in gas transportation eastbound from West Texas to the Gulf Coast.



production, flows

In September, production revenues from the Permian Basin averaged 15.2 Bcf/day, according to a modeled estimate by S&P Global. Compared to August, production has increased by approximately 200 MMcf/d. Production has increased by almost 600 MMcf/d since July.

With the Permian’s northbound pipeline corridor near capacity and the westbound route currently constrained by maintenance, producers in west Texas had no choice but to send gas east toward the US Gulf Coast.

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While flows on interstate pipelines such as the Gulf Coast Express, Permian Highway and Whistler Pipeline are not publicly reported, implicit flow data shows an increase in eastbound transmissions that began in August, with flows averaging nearly 9.4 Bcf/day as of August 1 through Sep 26 – up about 500 MMcf/d since July.

According to an estimate by S&P Global Commodity Insights, eastbound capacity from the Permian Basin is currently around 10 Bcf/day, with flows averaging nearly 94% to 95% of capacity.

Thanks to recent brownfield extensions to the three pipelines mentioned above, Permian producers can look forward to additional eastbound capacity totaling just over 1.7 Bcf/day as early as September 2023. Additionally, producers are hoping for more capacity to come online by Q4 2024. Greenfield 2.5 Bcf/d Matterhorn Express Pipeline is expected to come on stream.

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outlook

With recent Permian production growth, futures markets are already betting that Permian gas prices are in for a bumpy road.

For October and November, the market is currently priced at a steep discount of around $2.70-$2.80/MMBtu below Henry Hub. While the basis spread narrows during the main heating season, similar discounts will be priced in from March 2023, with no significant price relief expected until next November.

For the East Texas gas market, the impact of Permian price pain seems less certain.

While the October contracts on Katy and Houston Ship Channel are currently about $1.15/MMBtu below benchmark, the January and February base markets are now priced high. For Q2 and Q3 2023, pricing for the two sites is just 25 cents/MMBtu below Henry Hub, Platt’s M2MS forward data shows.