Steady global demand for crude and ongoing OPEC production reticence could motivate U.S. oil producers to keep output near record levels this year. In doing so, they could also continue to deliver robust amounts of associated natural gas from the Permian Basin, countering efforts elsewhere to curb supply in the face of low prices.
The Permian is the second-largest source of U.S. gas and, if supply from the prolific region remains elevated, it could substantially offset recent cuts made by exploration and production (E&P) firms in other basins to reduce a glut of supply amid a mostly mild winter. These include reductions by leading producers Chesapeake Energy Corp. and EQT Corp.
RBN Energy LLC analyst Tom Biracree noted that, confronted with sustained sub-$2/MMBtu natural gas futures and cash prices “and dim prospects for significant gas-demand growth” in the near term, “a number of major gas-focused E&Ps have been tapping the brakes on production and trimming their planned” capital expenditures for this year. This follows months of weak weather-driven demand and record levels of gas production late in 2023 and into early this year.
Henry Hub futures have languished beneath the $2 level for weeks, at times 50% below year-earlier levels. Physical markets, too, have struggled to find momentum. NGI’s March Bidweek National Avg., for example, fell $1.710 month/month to $1.505/MMBtu. That was down from $2.870 a year earlier.
Wood Mackenzie estimates in late February and to start this month showed production falling to lows of around 101 Bcf/d – more than 5 Bcf/d from 2024 highs. Prices rallied after production curtailment announcements from Chesapeake and EQT in recent sessions.
However, given enduring demand for oil – domestically and from major global markets such as China – and OPEC policy to slow its production, U.S. E&Ps have churned out record levels of oil and are widely expected to remain active. OPEC’s 13 member countries and 10 Russia-led allies – collectively known as OPEC-plus -- this month extended their 2023 oil output cuts of 2 million b/d oil through June.
“This approach indirectly benefits the U.S. shale sector, which has reached an unprecedented production level of over 13.3 million b/d of crude and condensate,” Rystad Energy analyst Jorge León said. Oil demand growth this year “is expected due to Asia and the resilient U.S. economy, even amid high interest rates.”
Long-Term Demand
American crude producers, in fact, steadily ramped up activity over the past year to fill the void left by OPEC-plus. León expects that to continue. Domestic petroleum production over the past four weeks averaged nearly 13.3 million b/d, just shy of all-time highs and up 100,000 b/d from a year earlier, according to the U.S. Energy Information Administration (EIA).
“Looking at oil and gas in total, production is very high and, if it’s slowing, it’s not slowing by much,” Samco Capital Markets’ Jacob Thompson, a managing director, told NGI. “Fact is, the domestic and global economies rely on oil and gas, and these producers see demand increasing, if anything, in coming years.”
Thompson said this is because of crude needs and an expected surge in LNG demand in coming years. Several Gulf Coast liquefied natural gas export facilities are slated to begin commercial operations over the next few years, drawing in part on Permian supplies.
The majority of gas from the Permian is produced alongside crude. Associated gas from the top oil plays in the Permian region nearly tripled over the past six years to nearly 14 Bcf/d.
Overall gas production eclipsed 106 Bcf/d in late 2023 estimates from Wood Mackenzie – setting an all-time high that was reached again early this year. Domestic gas inventories as of March 1 were 31% above the five-year average, according to EIA.
Should associated gas remain strong and E&Ps elsewhere only temporarily pull back – ramping back up later this year to meet the coming LNG wave – supplies in storage could remain stout and natural gas prices could further struggle until the jump in export demand arrives. Of course, an exceptionally hot summer and an accompanying surge in cooling demand could alter the market’s course.
Total natural gas production “has been fading for several weeks, but for many the risk of extrapolating the weakness forward was too great,” Mobius Risk Group analysts said of recent Henry Hub price headwinds.
The Mobius team said the anticipated LNG boom, on track to begin with the next heating season, holds “promise of higher future prices” and may motivate many producers to keep volumes elevated this year, including those active in the Permian.
The Permian region, covering swaths of West Texas and southeastern New Mexico, is the top crude-producing region in the United States, accounting for more than 40% of total domestic oil output, according to EIA. The region accounts for about one-quarter of total U.S. marketed natural gas production. The Marcellus Shale in the Appalachian Basin -- spanning Ohio, Pennsylvania and West Virginia -- is the largest source of natural gas from unconventional basins.
Analyst Francisco Blanch of BofA Global Research said that, while overall gas production is lower in March so far, some of the declines are because of midstream maintenance projects. He expects several gas basins to ultimately report production declines as the year wears on, but because of strength in the Permian, Lower 48 gas output likely will decline on average by less than 1 Bcf/d year/year in 2024.
What’s more, “E&Ps may have pent up supply to unleash” late this year and early next, Blanch said.
