Making a Case for $60 Oil Destabilizing Gas Markets

December 12th, 2017 |

WTI prices have stabilized near $60 (for now) as OPEC agreed to extend cuts through 2018 and compliance with targets has been good thus far. Higher oil prices should improve cash flows for producers with liquids exposure, thereby enabling incremental activity.  What does the extra activity in the oil patch mean to natural gas?  All else equal, the cash flow impact could mean an extra 4.3 Bcf/d of growth by mid-2020, with nearly 40% of that coming from the Permian.

US Natural Gas Production Growth

  • First disclaimer: this scenario assumes $60 WTI forever, all producer cash flow is reinvested, and there are no infrastructure constraints. If you’re interested in BTU Analytics’ comprehensive outlook for oil and gas markets, including infrastructure constraints, producer economics, the impact of DUCs, and supply and demand dynamics, this month’s Upstream Outlook includes BTU Analytics’ forecast and a special feature on what $60 oil really means when all these factors are accounted for.
  • Second disclaimer: the base case is not BTU Analytics’ forecast. It is a cash flow simulation using BTU Analytics’ price forecast that ignores DUCs, infrastructure constraints and assumes that 100% cash flow is reinvested.

Back to the scenario analysis. Higher production in oil plays would lead to higher associated gas production. The Permian is the biggest associated gas contributor in this scenario because economics are almost entirely based on oil prices and there is ample high-quality acreage. Breakevens for some acreage in the Permian in terms of natural gas prices are actually negative, meaning that even if producers had to pay someone to take their gas, it’s still economic due to the value of the liquids (if you want detailed inventory and breakeven analysis by basin, request a copy of the E&P Positioning Report).  Remember that Permian production grew even at $40 oil, and gas grew right alongside the liquids.

Historical Permian Basin Production Growth versus WTI

In the base case, Permian gas production grows nearly 40% from now until 2022; however, in the $60 WTI case, Permian gas production grows 63%.

Permian Natural Gas Production Growth

At $60 oil, associated gas would also grow in other oil plays, such as the Eagle Ford and Bakken.

Natural Gas Production by Region

Oil is Near $60, so What Lies Ahead?

A key assumption underpinning this scenario is assumed natural gas prices. These scenarios assumed the same price forecast in the base case and $60 WTI case.  If there were an extra 4.3 Bcf/d of production, regional basis in multiple regions would blow out, along with additional pressure on Henry Hub.  Prolonged elevated oil prices would incentivize associated gas production from oil plays, throwing the US gas market into oversupply.  Is this scenario actually far from reality?  Will oil prices give before gas prices collapse, or will LNG demand and Mexican exports support incremental growth?  Check out the Upstream Outlook for BTU Analytics’ latest view, and better yet, come meet us in Houston at our 2018 What Lies Ahead conference on February 22nd.