Sub-freezing temperatures forecast for West Texas in mid-January are threatening production freeze-offs in the Permian Basin, potentially fueling a continued rise in spot gas prices at Waha.
Over the next week, an artic airmass currently centered over western and central Canada is forecast to bring the coldest weather yet this season to the US West Coast, the Rockies and the Central Plains, including much of northern Texas, according to a Jan. 9 forecast published by AccuWeather.
In Midland and Odessa, nearby to the Permian Basin, overnight temperatures are expected to tumble below freezing over the next 10-12 days. From Jan. 15-16, temperatures in the region are forecast to drop into the single-digits Fahrenheit, according to weather data from S&P Global Commodity Insights.
Freeze-off history
For producers in the Permian, subfreezing temperature, especially ones in the single-digits, have often been associated with gas production declines, either through voluntary curtailments or from wellhead freeze-offs. The most infamous Permian freeze-off was the one prompted by the winter storm that brought Arctic temperatures to Texas in mid-February 2021. In the storm’s wake, gas production dropped nearly 9 Bdf/d almost overnight, fueling a spike in spot gas prices at Waha to over $200/MMBtu.
Even last winter, though, more typical cold weather caused at least two sizeable hits to Permian gas production. In late December 2022, output dropped by over 4 Bcf/d followed by a sharp rebound in the week following. From late January to early February, gas production took a second hit of about 2 Bcf/d but was much slower to recover – not fully rebounding until late February, S&P Global data showed.
While last winter’s freeze-offs were far less disruptive for Permian producers, spot gas prices at Waha still climbed sharply in the days immediately following the basin’s production drop.
Prices
In recent trading, spot gas prices at Waha are already up sharply as demand for Permian supply climbs amid colder weather and a rise in heating demand across the Texas, the Rockies and the Midcontinent.
In Jan. 10 trading, cash prices at Waha were up another 25 cents on the day to $2.605/MMBtu as the location reached its highest since an early season cold spell in late October. The move marks a significant departure from last month when spot gas prices at the West Texas hub averaged just $1.31, data from S&P Global showed.
In the forward gas market, traders are already banking on a longer-lasting price impact at Waha from this month’s colder weather and the potentially prolonged impact it could have on Permian Basin gas production. At market settlement Jan. 9, the Waha balance-of-month gas contract gained over 50% on the day to settle at just over $5/MMBtu, S&P Global’s most recently published Platts M2MS forward gas data showed.
Source: Platts