September 16, 2019 – Washington Post
Saudi Attacks Aren’t Bullish for One Energy Market
By Liam Denning | Bloomberg
There’s one energy market that won’t feast on renewed fear of conflict in the Middle East. The windfall accruing to oil producers after the weekend’s attacks in Saudi Arabia is a bad sign for U.S. natural gas.
Far from scrambling for supplies, production of freedom molecules just hit a new record. Ordinarily, that would be cause for celebration. And it is for customers. Producers, meanwhile, are drowning in the stuff – or, rather, burning it off. Flaring of natural gas, when producers burn the excess that they can’t use or sell, is also hitting records. Preliminary data from Rystad Energy show producers in the Permian shale basin flared more than 800 million cubic feet per day in June. On a trailing 12-month basis, they burned off almost enough to supply the entirety of Texas residential gas demand.
This is why even though the benchmark Nymex gas futures price has risen almost 30% over the past five weeks, it still trades below $2.70 per million BTU. Average swaps for 2020 are back merely to where they stood in mid-July.
We’re dealing with a broken market here, and the re-emergence of oil’s geopolitical premium exacerbates that.
This is because a significant portion of the growth in U.S. gas supply is effectively de-linked from the price. So much gas is being flared in the Permian basin because it’s a mere by-product of oil output. Associated gas comes out of the ground alongside oil. Producers care more about the latter, since it’s worth much more and easier to transport (oil can be trucked out if need be; not so with gas).
That means gas prices can fall very low and still not persuade frackers to ease off. How low? Speaking at a forum organized last week by the Center for Strategic and International Studies, Rusty Braziel of RBN Energy estimated that if oil is trading at $55 a barrel, a typical Permian well could break even with gas priced as low as negative $4. That’s right, they could pay customers to take the gas and still do OK – which happened in West Texas already this year.