Waha cash premium remains elusive, despite tighter Permian Basin supply balance

A slump in Permian Basin gas production this month is giving cash basis in West Texas a lift recently. With Waha still trading at a discount to the Henry Hub, though, prices remain well below the forward market’s earlier expectations, raising doubts over current balance-of-winter price valuations.

Since the start of January, Permian gas production has averaged about 13.4 Bcf/d marking a more-than-400 MMcf/d decline from its prior month average, data from S&P Global Platts Analytics shows.

The slump in production this month, which is not atypical at the start of a new year, comes just as colder weather across Texas and the Southeast boosts demand for Permian supply.

Combined, the drop-off in production and the uptick in demand is lifting basis prices to seasonal highs. From Jan. 1 to date, cash prices at Waha are averaging just 32 cents discount to Henry Hub – up from an average 44 cents discount last month and 48 cents discount in November.

While recent gains are noteworthy, cash basis at Waha remains well below earlier expectations. Just last month, the hub’s January forward contract traded at an average 18 cents premium to Henry Hub, briefly climbing to more-than-50 cents above the benchmark, S&P Global Platts M2Ms forwards data shows.

After rolling to January, Waha’s balance-of-month contract has traded at just a fraction of it’s earlier, full-month valuation, averaging just 3 cents premium to Henry Hub from Dec. 30 to date.

Winter outlook
Continued cash basis discounts at Waha in January, which have persisted despite a drop in production and stronger demand, raise doubts over current forward-market valuations for the balance-of-month and February contracts.

At market close Jan. 10, balmo prices at Waha settled as a surprisingly strong 3 cents discount to Henry Hub – about 35 cents above the cash basis settlement of minus 38 cents. The February contract, meanwhile, has maintained its premium to Henry Hub this month, even strengthening to nearly 16 cents over the benchmark after briefly trading at close to parity in late December.

One potential explanation for Waha’s winter-contract premiums could come from traders’ experience last winter. In February 2021, a historic production freeze-off across Texas, the Midcontinent and parts of the Southeast briefly lifted cash prices at Waha to record settlements at $150 to over $200/MMBtu. While prices at the Henry Hub also surged, great supply availability there kept the benchmark price to about $24 at its high. For the full month of February 2021, the record settlements at Waha lifted its cash basis average to about $29.50/MMBtu, S&P Global Platts data shows.

Production growth
Beyond February, forward-market valuations at Waha point to far-less-bullish outlook for West Texas gas prices over the balance of 2022. At market close Jan. 10, calendar-month prices for March settled at an average 59 cents discount to Henry Hub. For the second, third, and fourth quarters, forward basis is current priced at an average 69 cents, 56 cents and 51 cents, respectively, below the benchmark.

Over the past six to eight months, an acceleration in upstream activity across West Texas and eastern New Mexico has laid a solid foundation for production growth in the Permian this year.

In the week ended Jan. 5, rig count in the Permian was estimated at 299, just six shy of an earlier 20-month high recorded in late December, recent data published by Enverus shows.

Other indicators, published by the US Energy Information Administration, reflect a similar commitment by Permian operators to grow production over the near term. In November, the number of monthly wells drilled reached 300, marking its highest since April 2020. Since July, well completions have averaged over 400 per month – also the highest since the pre-pandemic days of first-quarter 2021, EIA data shows.
Source: Platts