Midcontinent Basis Rally Presents a Good Hedging Opportunity

May 1, 2020
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Midcontinent basis has risen sharply at points, but it is limited by a lazy downstream market.

While gas supply is likely to soon decrease, Chicago, a downstream demand market, is keeping a lid on producers’ basis pricing. Recent increases in Midcontinent gas basis present a good chance to hedge.

Across the producing areas west of the Mississippi, basis pricing has rapidly risen. The chart below shows historical basis among Waha (West Texas), and the major Midcontinent locations (Panhandle, ANR, and NGPL Midcont), eastern Oklahoma as Centerpoint (a.k.a. Enable). Chicago basis sits atop them all.

All these non-Chicago points are tied to the Chicago area via large, long-haul pipelines. Chicago depends on these areas for supply, and the basis locations tend to have some correlation.

However, the chart shows that recently the non-Chicago prices have risen to within a very narrow spread to Chicago.

Chicago winter-time basis had tested $0.50 as recently as Winter ’18/’19.
Price increases in producing regions have sent Midcontinent pricing much nearer to downstream points, specifically Chicago.
Some parts of the Midcontinent curves are bound by Chicago pricing.

Narrow transportation spreads suggest less gas could be flowing to market. So, has Chicago pricing moved higher? No, Chicago has been very stubborn. The chart below shows the next five seasons of Chicago basis. Despite the upstream prices rallying, Chicago has stagnated.

Chicago’s upcoming winter strips have traded much higher in the past, but have recently rallied.
Tiny increases in forward Chicago pricing do not seem to agree with widespread associated-gas and rich-gas supply losses, perhaps arriving this winter.

Chicago’s Summer ’22 strip has moved up a little, and it’s Winter ’22-’23 strip has done the same. But you can see that those specific strips have historically traded higher – over +$0.20 in mid-2016. Further, from the first chart, it is obvious that winter-time Chicago basis has realized much higher, too.

AEGIS notes that without a rally in Chicago-area pricing, further basis improvements in the Midcontinent area will be difficult. It is an advantageous time to hedge Midcontinent basis, unless you are convinced that Chicago should soon move higher, raising the invisible ceiling on western Oklahoma prices.

See also: Rockies Natural Gas Basis Rises Amid Lower Oil Prices

Waha Prices Are Much Improved as Permian Oil Production Is Set to Fall

We continue to monitor oil, gas, NGLs, and regional markets for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact info@aegis-energy.com. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at view@aegis-energy.com

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