Low Natural Gas Prices Curb U.S. Oil Production Gains

• Low natural gas prices, particularly in the Permian, are discouraging drilling activity for US oil producers.
• Rising drilling costs are another factor limiting US oil production growth.
• Investor pressure on oil companies to prioritize returns over production is further dampening the shale oil boom.

U.S. oil producers are not in a rush to significantly boost production despite oil prices hovering at a six-month high, as multi-year low natural gas prices are holding back drilling in parts of the Permian and costs have increased, analysts and industry executives tell Reuters.

Last week, WTI crude prices hit their highest level of the year so far, and the highest since the middle of October 2023, amid geopolitical flare-ups in the Middle East and signs of tightening oil markets.

But producers in America, where part of the natural gas is associated gas from oil drilling, are not jumping the gun. They are mindful of the investor demands for higher returns, not necessarily higher production.

“Natural gas is currently pricing at or below costs of production,” an executive at an exploration and production company said in comments in the latest quarterly Dallas Fed Energy Survey released at the end of March. 

Moreover, the same survey showed that breakeven prices for all oil-producing basins, including the Permian, have increased over the past year. Breakeven prices for companies to profitably drill a new well in the Permian now average $65 per barrel, which is $4 higher than last year, the survey showed. Almost all firms in the survey can profitably drill a new well at current prices, Dallas Fed says.

Nevertheless, producers are cautious.

“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,” Mark Marmo, CEO of oilfield firm Deep Well Services, told Reuters.

For context, the U.S. natural gas benchmark, Henry Hub, has been depressed below $2.00 per million British thermal units (MMBtu) since early February, due to weak winter demand amid milder weather, record output at the end of 2023, and higher-than-average natural gas stocks. 

Since March, the spot natural gas prices at the Waha hub in West Texas, in the Permian, have turned negative several times, sinking to as low as -$1.16 per MMBtu on March 18, per EIA data.

By Charles Kennedy for Oilprice.com

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