Downside of oil Rally | Russell T. Rudy Energy LLC
“World Oil” reports that for the first time in 16 months, natural gas prices have finally broken the $3 per Mcf (thousand cubic feet) barrier. Record demand as a result of an unusually hot summer, pipeline sales to Mexico, liquefied natural gas (LNG) exports, and fuel substitution from coal to natural gas, have all helped. Also, diminished supplies from Appalachia’s Marcellus shale have been a factor.
However, this could all be offset by the recent oil price rally. Higher oil prices mean more production of oil and associated natural gas. This could lead to increased gas volumes which would exert downward pressure on gas prices. The exposure is especially acute in the Permian Basin of West Texas and Southeast New Mexico, one of the few places where new oil wells can break even at prices as low as $30 per barrel. In this area alone, oil well gas could reach almost 7 billion cubic feet per day.
Permian operators, such as Occidental Petroleum and Pioneer Natural Resources, have responded enthusiastically to $50 oil, adding 45 drilling rigs in the last three months. To put this in perspective, the Eagle Ford shale in South Texas has only seen the rig count increase by 2 over the same period. The trend will only accelerate with Apache’s recent discovery of the massive Alpine High field in the Southern reaches of the Permian Basin.
Douglas Hock with Encana Corp. observes that while gas is boosting the company’s profits in the Permian Basin, the primary objective is crude oil. “It’s good to have, but associated natural gas isn’t the driver of our economic performance in the Permian.”
As Randall Collum with Geoscape Inc. sums up the situation in the Permian Basin, “The gas economics are totally tied to oil prices, and the higher the oil prices go, the higher the gas production will be. Bullish oil prices are bearish for gas prices.”
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/10/14/oil-rebound-s-dirty-little-secret-threatens-us-gas-bulls .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
