The Daley Note: March 30, 2023
The long-awaited restart of Line 2000 of the El Paso system has brought producers in the Permian Basin only a few weeks of relief from low natural gas prices.
Waha spot prices have been under mounting pressure for most of March, trading over the recent March 20-24 week at an average ~$1.20/MMBtu discount to the Henry Hub benchmark, according to Bloomberg data. Waha gas prices averaged $0.65 over the latest March 25-27 weekend.
The recent weakness reverses the trend seen in February, when West Texas gas prices gained ground after Kinder Morgan’s (KMI) El Paso Natural Gas system restarted commercial service on the repaired Line 2000. The pipeline had been offline for 18 months following an explosion in Arizona in August 2021.
The return of Line 2000 on Feb. 15 added 600 MMcf/d of takeaway to the Southwest region and California border, loosening up space on crowded egress pipelines and allowing Permian gas to swing to higher bidders. The Waha-Henry Hub spread tightened to $0.30/MMBtu in the days following the return of Line 2000 (see figure).
At the recent $1.00-plus discount to Henry Hub, Waha in late March is trading at comparatively weaker prices than in early February, when Line 2000 was still unavailable.
East Daley follows regional prices in our Permian Basin Supply and Demand Forecast as indicators of supply and midstream trends. The widening Waha-Henry Hub spread in March suggests the newly available pipeline capacity from Line 2000 has already been filled with supply growth.
The recent market action could confirm East Daley's view that Permian gas production will quickly grow into pipeline expansions planned in the back half of 2023. With Line 2000 back in service, Permian gas output also can continue to run higher Y-o-Y, contributing to the oversupply we expect for natural gas in 2023.
In our latest Permian Basin Supply and Demand Forecast, we project egress pipelines are currently running at 97% of effective egress capacity out of the basin, and to run at an average 99% of effective capacity through YE23. – James Taylor Tickers: KMI.
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