Permian producers struggle with negative gas prices

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

Permian producers are often in a constant race to expand offtake capacity as rising supply overwhelms existing offtake options and requires new pipelines or expansions to handle increased production. The chart above shows historical Waha strike prices alongside the forward curve.

While this static view provides insight, it does not capture the evolution of the curve over time, which is better illustrated in the seasonal strip chart below. For this, we can turn our attention to the chart below, which shows selected seasonal strips over time.

Note the continued decline in futures prices for Waha, reflecting market expectations that exit problems will continue despite new pipeline expansions. Since early 2024, futures prices have been trending downward as exit problems are expected to continue despite new incoming pipes.

Now let's look at the real-time price weakness. With producers operating at the very edge of the basin's available offtake capacity, Waha gas prices have frequently settled in negative territory on both the prompt month and spot markets. The Waha spot market behavior shown below highlights just how unfavorable pricing has been up to this point in 2024. At the time of writing, Waha spot prices have been negative on 109 of the 235 days (including weekend prices) in 2024, an astonishing 47% of the time!

It all boils down to offtake capacity versus supply. As we sit here today, modeled supply in the Permian is overwhelming daily available offtake capacity. The chart below shows that help is on the way shortly in the form of the 2.5 Bcf/d Matterhorn pipeline (brown stacked area). This large greenfield pipeline provides the much-needed offtake relief that is causing such acute weakness in Waha.

There are mixed opinions on how quickly the Matterhorn pipeline will reach capacity. Some say it could be full as early as next spring. That capacity is not necessarily enough to handle all the new gas. Instead, existing supply from less attractive corridors like West Texas could be diverted to the Midcontinent. The key will be how much “new” gas comes to market in the next three to six months after the Matterhorn project.

While the Matterhorn pipeline offers some relief, this could be short-lived. The Waha forward curve for Cal 2025 and Cal 2026 still shows significant weakness. The front of the curve at nearly -$3.00/MMBtu is in line with our earlier discussion, but discounts of around -$1.25 to -$1.29 for Cal 2025 and Cal 2026 raise questions. A weak Cal 2026 is understandable, as the next major pipeline, WhiteWater's Blackcomb pipeline, is not scheduled to be completed until late 2026. However, a similar discount for Cal 2025 could indicate that severe weakness in 2024 is dragging the price down, or that traders are very optimistic about supply in the Permian and expect the drain ports to fill sooner rather than later. In any case, gas prices in the Permian 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 on Aegis Hedging

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