Waha Daily Cash Prices Are Being Punished; Forward Prices Are Excellent

October 23, 2020
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The vulnerability of the spot market shows why forward hedges are so necessary

Waha gas this weekend is negative -49c, and it hasn’t been worth more than a dollar since September 29. In stunning contrast, the Permian gas hub is only a -22c discount to Henry Hub for the entire 2021 calendar year ($2.82 fixed price).

The reasons behind the cash-price weakness is an old story: insufficient pipeline space in times of low Texas demand. But this time, an outage on El Paso pipeline going west to southern California is making it worse. Gas on that corridor usually runs at 2 Bcf/d; lately, it’s been just over 1.6 Bcf/d.

Meanwhile, the forward-looking story for that same Waha pricing point could not be more different. Cal 2021 Waha basis (difference from Henry Hub) is only -$0.22/MMBtu. It has been improving during the same time span during which cash prices have suffered – up from its low of -$0.46 on October 5.

The improvements are most easily explained by floundering oil prices and a new pipeline arriving soon.

First, oil prices hovering in the low $40s does not imply much growth in oil production or in the associated gas that would come with it. Lower supply means better basis pricing.

But this week Kinder Morgan said its 2 Bcf/d Permian Highway pipeline is 97% complete and is on schedule to be in place by early 2021. That capacity helps Waha prices better connect to Texas Gulf Coast markers like Houston Ship Channel. Further, it reduces the need for Waha gas to try to force itself north into Oklahoma and compete with in the Midcontinent.

Extra pipeline capacity will help Waha values next year and in 2022. But AEGIS notes that the recent collapse in Waha spot prices shows a continued vulnerability to operational upsets and low demand with Texas. We urge clients to use this rally in Waha basis to finish any remaining hedges for gas. The recent combined increases in Henry Hub and Waha are an opportunity not to be missed.

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