PERMIAN NATURAL GAS PENDING DOOM

Permian Natural Gas Pending Doom

The physical Waha natural gas hub in the Permian basin traded sub-zero for weekend delivery during the MLK holiday weekend in January.  Extremely mild temperatures, low weekend holiday related demand, and an oversupplied and under-piped market are the reasons for the sub-zero pricing.  However, the sub-zero pricing has been occurring without any pipeline maintenance on the Permian natural gas pipelines, albeit wind generation was strong over the weekend.  Pipeline maintenance is a bearish event in the Permian because it is a producing region, and it causes the natural gas in the region to be stranded.  The sub-zero natural gas pricing without any pipeline maintenance in January portends the strong possibility of negative natural gas prices for an entire month on average for next day delivery at the Waha hub during the months of April through May and possibly June.  April and May typically have milder weather and less degree day demand than January in the Permian.  Also, the wind generation in Texas will likely be running more on a seasonal basis in April and May.  Natural gas production in the Permian will also likely be higher over the next few months due to the associated natural gas supply from higher crude oil production.  Crude oil prices are at around $80/Bbl and are still economically attractive to modestly increase production and activity.  Overall, it looks highly likely that there will be persistent sub-zero natural gas pricing in the Permian basin at the Waha hub during the shoulder season months of April, May, and June.  The Apr-23 and May-23 fixed price contracts for Waha are still trading a little over $1/MMBtu.  The market hasn’t gotten to the point of negative pricing on average for Apr-23 and May-23, however the physical next-day market in January is indicating that this will very likely be the case when we get into Apr-23 through May-23.  Permian basin natural gas production should see some relief when the Permian Highway Pipeline Expansion Project comes online in Nov-23.  The expansion project will have 550 MMcf/d of new capacity.  In the meantime, it looks like pending doom for the Permian natural gas market this coming spring.

Hyperion Data Update

Fracking activity as of around mid-January in the Lower 48 US remains sideways towards the bottom of the 250 to 316 count range since Apr-22.

Lower 48 rig count activity is faring somewhat better than the fracking activity yet remains towards the lower end of the 800 to 861 count range since August-22.

The same is true with the Haynesville Texas and Louisiana regions for both frack and rig counts.  They remain in at least a 6-month sideways range.

The Permian basin (West Texas and Permian-New Mexico) is telling a bit of a different story with rig counts at the top end of a 6-month range and frack counts at the middle end of a 6-month range.

The Permian basin’s relative strength in rig counts and frack counts is coming from the much stronger oil market.  The Permian is predominately an oil producing basin.  This contrasts with the pure natural gas basin in Haynesville where rig and frack counts are in a relatively weaker position due to the much weaker natural gas market.  Overall, the oil and natural gas markets are splitting apart from each other.  Oil fundamentals are bullish because production is still below its pre-pandemic highs and demand from China is going to return with the relaxing of Covid lockdowns.  Natural gas fundamentals are bearish due to production being well above its pre-pandemic highs, the continued loss of 2 Bcf/d of LNG export demand from the Freeport terminal, a big slowdown in industrial demand growth, and a very mild winter putting a strain on storage inventories.