The oversupply of natural gas (NG=F) in the US has caused natural gas prices to fall to multi-decade lows, dropping 43% over the past year.
Prices at Waha Hub, a major trading spot in West Texas, were negative for much of March and into April, according to government data released this week. So the producer essentially paid someone to take it off their hands.
The phenomenon highlights challenges that have plagued West Texas' Permian Basin for years. It has large amounts of natural gas and not enough capacity to transport goods outside the region.
“The domestic natural gas market has plenty of supply capacity, but not enough take-home capacity,” Ed Haas, a senior research fellow at the University of Houston, told Yahoo Finance.
In recent years, Waha Hub's price has fallen into negative territory multiple times, falling below the level of the U.S. benchmark Henry Hub.
Most of the natural gas production in the Permian Basin is a byproduct of crude oil production, often referred to as associated gas. As U.S. oil production hit a record high last year, natural gas supplies also increased.
Futures were at $1.80 per million British thermal units (BTU) on Thursday after Energy Information Administration (EIA) data showed last week's inventories were about 38% above the five-year average. traded below.
A warm winter has further exacerbated downward pressure on prices this year. The EIA expects natural gas inventories to “remain relatively high through 2025, and natural gas spot prices to remain relatively low.”
Oversupply has already prompted producers to cut production. Some energy analysts are pointing to the risk that crude oil production growth could slow, with West Texas Intermediate (CL=F) up 20% since the start of the year.
Andy Lipow, president of Lipow Oil Associates, told Yahoo Finance: “This pipeline's lack of take-home capacity means that by 2024 the Permian “Oil production in the basin could be limited.”
Goldman Sachs analysts on Thursday said the decline in U.S. crude oil production in January was due to extreme weather and the inability of shale producers to transport their byproduct natural gas.
“Transportation constraints could significantly reduce the marginal price of natural gas in the Permian, reducing incentives to produce oil and related gas,” Yulia Zhestkova Grigsby and her team wrote. .
Analysts predict that the marginal revenue from associated gas per barrel of oil produced in the Permian will fall from about $20 per barrel in 2022 to less than $2 per barrel in the first quarter of 2024. It is estimated that it did.
APA, the holding company for hydrocarbon exploration company Apache, said this week that it cut natural gas production in the first quarter, primarily during March, in response to weak or negative Wahahab prices.
Several projects are being implemented to expand takeout capacity in the Permian Basin, including the new Matterhorn Express Pipeline, which will connect west Texas and southern New Mexico to Houston; is scheduled to be completed by the end of 2024.
“They are [the projects] It will help, but it's not large enough to solve the problem on its own,” said Haas of the University of Houston.
“As the Permian fields continue to advance, the light oil fraction is increasing,” he said. “We need to add more to-go capacity.”
Analysts expect demand for natural gas to increase as energy consumption increases due to the industrialization of AI and green energy.
“It's much harder to change demand over the long term,” RP Capital's chief investment officer, Vijay Malloria, told Yahoo Finance. “In the future, supply will decrease and prices will rise.”
Ines Ferre is a senior business reporter at Yahoo Finance. Follow her on X @ines_ferre.
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