Spot gas prices in the US Southwest could see a sharp increase by later this week as a force majeure on El Paso Natural Gas continues to cut supply to the region amid a forecast spike in temperatures.
Earlier in August, El Paso declared a force majeure on its Line 2000 near Coolidge, Arizona, after a segment of the pipeline suffered a failure. As El Paso conducts repairs on the line, capacity through the Cimarron compressor station has been reduced to zero – down from its fully operational 567 MMcf/d, according to a critical notice published to the operator’s electronic bulletin board Aug. 15.
The reduction in westbound capacity on El Paso had a fleeting effect on Permian Basin gas production and cash prices, both of which immediately dipped following the incident. In the Southwest, the reduction in Permian supply has yet to show a clearly discernable impact on prices at destination markets like the SoCal Gas border hub or PG&E South, which have moved lower recently amid cooler weather.
With forecasters now calling for another heatwave across the Southwest later this week, though, the reduction in Permian supply will likely hit harder – potentially fueling an outsized rally in the cash markets as the region grapples with additional demand from power generators.
Market outlook
After dipping to an average 73 degrees Fahrenheit over the past week, population-weighted temperatures across the Southwest are forecast to reach 76 degrees by later this week.
The rising mercury should lift generator demand for gas across the Southwest with power burn expected to climb more than 1 Bcf/d from its current level, topping out around 4.7 Bcf/d by late August, S&P Global Platts Analytics’ most recent forecast shows.
Forward gas markets are already bracing for a steep rise in spot prices.
At the SoCal Gas border hub, the balance-of-August contract settled most recently at $6.31/MMBtu – a nearly $2 premium to the cash market’s preliminary settlement price on Aug. 23. The market has been less bullish on the potential price impact at PG&E South where the balance-month contract settled most recently at $3.75/MMBtu, roughly flat to the current spot price, S&P Global Platts data shows.
Flows
Since the announcement by El Paso of a force majeure on its Line 2000, westbound flows from the Permian Basin have averaged just 3 Bcf/d, dipping slightly below that level over the weekend. In the 30 days prior to the incident, westbound flows from the Permian Basin had averaged nearly 3.45 Bcf/d, Platts Analytics data shows.
While some of the displaced production has been rerouted to Transwestern Pipeline, which also flows west, the majority has been diverted to flow northbound.
Over the past week, northbound volumes from the Permian have jumped to an average 430 MMcf/d – up sharply from about 240 MMcf/d in the 30 days prior to the force majeure.
With Transwestern currently flowing just below its 1 Bcf/d capacity, the forecast spike in Southwest demand later this week is unlikely to significantly boost Permian supply to the region before pipeline repairs on El Paso’s affected segment are completed.
Source: Platts