Shale producers should be ramping up activity as the price of U.S. crude oil jumped above $86 a barrel, its highest since October. But the weak natural gas market – among other things – is inhibiting drillers from boosting their output in the United States.
Natural gas benchmark Henry Hub futures are below $1.80 per million British thermal units (mmBtu) – which is extremely low by recent standards. Earlier this year those futures hit a 3-1/2-year low on warm weather and oversupply. This matters because it makes the gas effectively worthless to produce, and when oil is drilled, what’s known as “associated” gas comes with it. That gas either has to be burned off, adding to emissions, or stuck back into the ground.
In West Texas, producers are paying to have shippers take their gas. Prices at the region’s Waha hub have been below zero in several trade sessions since March, a sign that supply is sharply outpacing demand and pipeline capacity. Producers are watching potential fees for methane releases above certain thresholds as another cost – also constraining output. “The methane detection enforcement procedures for small producers is a looming crisis,” one energy executive told a Dallas Fed survey last month.
Overall U.S. oil output hit a record at year-end around 13.3 million barrels per day – but for more, natural gas prices might need to rise. “We need gas prices to get to $2.50 for an overall increase in activity. The Permian customers that have associated gas are seeing awful differentials,” said Mark Marmo, CEO of oilfield firm Deep Well Services.
