As summer-like heat settles across Texas and neighboring states – and production in the region levels off – South Central natural gas storage surpluses are steadily narrowing.
Inventories in the region were 21% above the five-year average as of May 17, according to the latest U.S. Energy Information Administration (EIA) data released Thursday. That was down 2 percentage points from the prior week and well below mid-March, when South Central stocks were 42% above the five-year average.
While still elevated, inventories in the South Central are closer to historical norms than any other region. The Pacific follows at 27%, and that region is also narrowing the gap. It has nearly been cut in half since March.
The surplus in the South Central swelled over the winter months – and nationally – amid a mild winter that coincided with record levels of production during the heating season. Total Lower 48 natural gas output reached all-time highs near 107 Bcf/d in February, according to Wood Mackenzie data. In the Permian Basin of Texas and New Mexico, gas production hovered close to 18 Bcf/d on average and touched records around 20 Bcf/d.
Most of that Permian supply consisted of associated gas produced alongside oil. U.S. crude producers bolstered output to record levels above 13 Bcf/d late last year and early in 2024 – with nearly half of it coming from the Permian – and associated gas followed suit.
However, both have leveled off during the spring months, in part because oil producers had aligned with demand but also because takeaway constraints out of the Permian had backed up associated gas supplies. The latter was amplified by spring maintenance work on Kinder Morgan Inc.’s Permian High Pipeline and other systems in the basin that created a supply glut, cratered prices and necessitated some pullback.
Permian cash market benchmark Waha traded in negative territory through most of the spring, with producers forced to pay to have excess supply taken away. Some of that extra supply was injected into underground storage in the South Central.
Now, cooling demand is rapidly mounting, limiting the magnitude of further injections and enabling utilities to narrow the surplus of storage relative to the five-year average. The hotter conditions arrived as maintenance projects are winding down. With moderated production to boot, Waha prices have climbed back into positive territory over recent sessions. Spot prices at the Waha hub Thursday were up 6.0 cents to average 24.0 cents/MMBtu, NGI data show.
“Oil and gas production was on fire for a while there” in the Permian. “It’s still very strong by almost any measure, but it seems to have flattened some,” Jacob Thompson, managing director at Samco Capital Markets, told NGI.
This happened just as demand on the gas side is increasing, Thompson noted, and futures prices have responded as well.
Prompt month Henry Hub futures closed down Thursday amid profit-taking, but were up 37.5% since the start of May. Temperatures in the upper 80s and 90s proved commonplace in Texas during mid-May. More extreme heat is on the way for the long Memorial Day weekend and into the trading week ahead.
Highs in the 90s and elevated humidity were expected for Dallas and Houston, and higher temperatures were forecasted for the southwest portion of the Lone Star state, according to AccuWeather.
"Triple-digit heat will be felt in southwestern Texas, with records challenged in some locales,” said AccuWeather meteorologist Renee Duff.
Sustained Price Momentum?
The forecaster said temperatures also “continue to rise to summerlike levels” across the Southwest and into California – regions that burn through Permian gas to power air conditioners.
With storage still elevated in the South Central as well as the Pacific region, spot prices have yet to pop in the Southwest and Southern California.
KRGT Del Pool in the Southwest on Thursday, for example, was flat at $1.115, while Southern Border, PG&E in California rose 25.5 cents but only to reach $1.020.
However, if surpluses further decline along with an early start to summer, upward price momentum is likely to take hold, Paragon Global Markets LLC’s Steve Blair, managing director of institutional energy sales, told NGI.
“That’s especially likely if we start to see evidence of not only a hot summer but a long one, and if at the same time, production doesn’t pick back up,” Blair said.
RBN Energy LLC analyst Housley Carr said that “Permian production may have plateaued,” at least for the near term.
Longer term, he added, producer-backed plans to continue adding gas processing capacity in the Permian’s Delaware and Midland sub-basins suggest output is likely to rebound later this year and into next year and beyond. In total, Carr noted, 3,405 MMcf/d of Permian gas processing capacity is scheduled to be added in 2024, 2025 and 2026 is in the Delaware, with another 2,050 MMcf/d slated to come online in the Midland during that time.
Producers are preparing for a rebound in order to meet an expected surge in export demand. Five LNG projects are under construction along the Gulf Coast.
“That suggests” major players “expect to ramp up their production of Permian crude oil and associated gas over the next year or two,” Carr said.
The expected boom in export demand could soak up added supply, but for prices to strengthen into a sustained rally in the coming months, heat and strong domestic demand will likely need to endure through the summer, Blair said.
National Weather Service forecasts call for just that – with above-average temperatures expected across the South and most of the Lower 48 throughout the season.
Total U.S. storage stood at 2,711 Bcf as of May 17, or 29% above the five-year average. But that surplus has dwindled from 41% in mid-March.
Looking ahead to the next EIA storage print, covering the week ending May 24, early injection estimates submitted to Reuters ranged from 80 Bcf to 86 Bcf. The estimates compare bullishly with a five-year average increase of 104 Bcf.
