A natural gas (NG=F) The glut in the United States has sent prices of the product to their lowest level in several decades, down 43% over the past year.
At the Waha Hub, the key trading point in West Texas, prices were negative for most of March and into April, according to government data released this week. This means that the producers essentially paid someone to get rid of them.
The phenomenon highlights a multi-year challenge facing the Permian Basin in West Texas: lots of natural gas and not enough capacity to transport the product out of the area.
“The U.S. domestic natural gas market has ample supply capacity and insufficient delivery capacity,” Ed Hirs, a senior research fellow at the University of Houston, told Yahoo Finance.
In recent years, prices at the Waha Hub have plunged into negative territory several times, falling below the U.S. benchmark, the Henry Hub level.
Most natural gas production in the Permian Basin is a byproduct of crude oil production, often called associated gas. As US oil production reaches records last year, the supply of natural gas too.
Futures fell below $1.80 per million British thermal units (BTU) on Thursday after data from the Energy Information Administration (EIA) showed last week’s inventories were around 38 % above five-year averages.
A mild winter has exacerbated the downward pressure on prices this year. EIA waits natural gas inventories “will remain relatively high and natural gas spot prices will remain relatively low through 2025.”
Oversupply has already prompted producers to cut production. Some energy analysts point to the risk of less growth in oil production at a time when West Texas Intermediate (CL=F) has has climbed 20% since the start of the year.
“Lack of pipeline capacity could limit Permian Basin oil production in 2024 because companies can’t simply burn the associated gas into the atmosphere,” Andy Lipow, Lipow’s president, told Yahoo Finance Oil Associates.
On Thursday, Goldman Sachs analysts said the drop in U.S. oil production in January was due to, among other factors, extreme weather and the inability of shale producers to transport derived natural gas.
“Transportation constraints significantly reduce the marginal price of natural gas in the Permian, which may reduce incentives to produce oil and associated gas,” Yulia Zhestkova Grigsby and her team wrote.
Analysts estimate that marginal associated gas revenues per barrel of oil produced in the Permian fell to less than $2 per barrel in the first quarter of 2024, compared to nearly $20 per barrel in 2022.
This week, the APA (WHAT), the holding company of the hydrocarbon explorer Apache, revealed it reduced natural gas production in the first quarter, mainly during March, in response to low or negative prices at the Waha hub.
Several projects have been implemented to increase transportation capacity in the Permian Basin, including the new Matterhorn Express pipeline connecting west Texas and southern New Mexico to Houston, which is expected to be completed by the end of 2024.
“They (the projects) will help, but they are not big enough to solve the problem on their own,” said Hirs, of the University of Houston.
“As the Permian field continues to advance, the gas oil ratio increases,” he said. “We need to add more takeout capacity.”
Analysts expect demand for natural gas to increase as energy consumption increases thanks to AI and the industrialization of green energy.
“Demand is much harder to change in the long term,” Vijay Marolia, chief investment officer at RP Capital, told Yahoo Finance. “Supply will decrease in the future, which will cause prices to rise.”
Ines Ferre is a senior economics reporter for Yahoo Finance. Follow her on @ines_ferre.
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