Amid a surge in oil prices, Texas is experiencing an unusual situation: natural gas producers are grappling with excess supply, leading them to pay customers to offload the surplus. This phenomenon can be attributed to the current state of oil prices.
With crude oil prices hovering near a six-month high, oil extraction companies are turning to previously drilled but unfinished wells to capitalize on the increased profitability. However, these wells also yield natural gas, and the oversupply in the US gas market has created challenges. A notably warm winter has dampened demand, resulting in gas stockpiles sitting nearly 40% above the five-year average. Consequently, pipelines are congested, exacerbating the situation.
The surplus has driven gas prices into negative territory, plummeting to approximately -$2 per million British thermal units at West Texas’ Waha hub this week. Despite this, producers continue to extract crude oil, prioritizing profitability, even if it means absorbing losses on the accompanying gas.
An oil pump jack in Midland, Texas.Photographer: Sergio Flores/Bloomberg
“Dennis Kissler, senior vice president for trading at BOK Financial Securities Inc., noted that the surge in oil prices is prompting the activation of these previously drilled, yet uncompleted wells. This influx is oversaturating the market with gas, compounded by the absence of significant demand,” observed Kissler.
With much of the US yet to enter the air-conditioning season, which typically stimulates gas demand, gas enthusiasts may find little cause for optimism in the immediate future.
Should negative prices endure, or worsen, oil companies may reassess the viability of increasing crude production, considering the expense of managing its byproduct, gas.