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Going with the Flow: West Texas Natural Gas Outlook

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Chris Amstutz's picture
Risk Management Associate Choice! Energy Management

Chris Amstutz joined Choice! Energy Management in 2017. With an emphasis on identifying Natural Gas and Electricity market opportunities for clients, Amstutz publishes market intelligence pieces...

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This item is part of the Special Issue - 2019-01 - Predictions & Trends, click here for more

The latest buzz in the energy community is of the infrastructure build-out occurring in West Texas. The mighty Permian basin is gaining notoriety again, as fracking enabled hydrocarbons have begun streaming out of West Texas. It is no secret that oil is king, but another important story to watch will be what happens to the natural gas produced in the Permian basin. The region is heavily oversupplied with natural gas and has resorted to flaring the oil production by-product.  So how much more natural gas can we expect to see? And where will this natural gas flow in the region? Today, we take a look at the fundamentals affecting oil and natural gas production in the Permian basin, and how this could affect the natural gas market in the next 2–3 years.

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Oil Economics

With roughly three times greater profit return for US companies than natural gas, oil is certainly king in the hydrocarbon world. Monitoring the associated gas production from the West Texas region will be important in the coming months. It is a general rule that a higher oil price brings more oil production, which in turn brings more associated natural gas production, lowering natural gas prices, holding all else equal. So keeping this in mind, basic oil fundamentals affecting natural gas prices to watch are:

-Rising oil prices due to a weakening of the dollar, hopeful resolution between the U.S. and China, and OPEC production cuts. (Bearish NG)

-Potential for oil prices to fall if a global economic slowdown occurs. (Bullish NG)

-The elasticity of Permian producers in reaction to these events, often measured in companies capital expenditure, rig counts and pipeline flows.

Pipelines

The most important factor for West Texas at this time is simply getting the commodities to market. Oil and natural gas pipelines are at or near capacity. A slew of pipelines are expected to come online from mid 2019 to 2021. These are important ones to track the progress of:

-The EPIC, Gray Oak, Cactus II and other crude pipelines will add roughly 3.5 million b/d in capacity, a 93% increase, by mid 2020. (Bearish NG)

-The Gulf Coast Express, Pecos Trail, Permian to Katy, and other natural gas pipelines will add roughly 5.7 BCF/d, a 45% increase, in takeaway capacity by the end of 2020. (Bearish NG)

Demand Factors

This natural gas will be flowing to different demand sources. Here are some of the demand fundamentals balancing out the additional Permian gas supply:

-Freeport and Corpus Christi LNG will demand 3 BCF/d by summer 2020. An astounding total of 12 BCF/d, a 300% increase, will be demanded by all LNG facilities in TX/LA by the end of 2022. (Bullish NG)

-Mexico will demand an additional 1 BCF/d by the end of 2019, a 20% increase, as infrastructure expands south of the border. (Bullish NG)

In all, Texas is facing an infrastructure build out that will greatly alter domestic and global energy markets. Many of the tracked fundamentals are in uncharted territory. Natural gas production is more heavily reliant on oil fundamentals in this region, so the situation is more complex. The timing of each pipeline will be crucial for regional (Waha hub) natural gas pricing, and its impacts on hubs downstream, such as Houston Ship Channel. Any timing imbalances between production, pipelines, and the demand fundamentals will have volatile impacts on pricing. They say everything is bigger in Texas, but when these infrastructure projects are finished, Texas will be vaulted even more into the global export market spotlight.

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