As the war in Iran disrupts natural gas supplies, countries across Asia and Africa are implementing fuel rationing and facing blackouts, while Europe faces a heightened risk of an energy crisis this winter. Meanwhile, in the United States, natural gas is so abundant that producers are incentivizing buyers to take excess supplies off their hands.
The Permian Basin, spread across West Texas and New Mexico, has established the U.S. as the world’s top oil producer. However, the boom in oil extraction has led to an oversupply of natural gas, considered a byproduct of crude oil production. Current pipeline capacity is insufficient to transport this surplus gas to customers or export terminals. As a result, prices for Permian gas have dipped below zero, meaning sellers are effectively paying buyers, a phenomenon that has become more pronounced recently.
This situation has implications for the broader U.S. gas market. While benchmark futures have dropped by 10% since the onset of the Middle East conflict, European futures have surged by approximately 40%, and Asian prices have seen an increase of over 50%. The new pipelines expected to come into operation this year will likely end the negative pricing in the Permian. Nevertheless, the current circumstances signal a gas surplus of such magnitude that the U.S. finds itself insulated from the energy shocks stemming from the conflict, fostering economic advantages. This cheap gas, essential for manufacturing and critical to meeting the rising power demand from artificial intelligence, positions the U.S. favorably against nations grappling with fuel shortages.
Chris Louney, director of global commodity strategy at RBC Capital Markets, emphasized that U.S. gas prices have not only remained lower than global benchmarks but have also avoided the volatility caused by international gas markets. “This comparative energy security benefits domestic industries reliant on natural gas as a feedstock or source of industrial heat, particularly in power-hungry sectors such as AI and data centers,” he stated.
Despite rising energy costs for Americans, the existing natural gas surplus mitigates soaring power bills. While inflation and higher gasoline prices remain issues, the drop in utility gas prices has contributed to a lesser impact on overall costs, as reflected in March’s Consumer Price Index report.
Production from shale formations like the Permian has driven U.S. oil and gas output to record levels, forming a crucial part of the U.S. government’s energy strategy aimed at achieving energy independence. In recent years, gas prices in the Permian have occasionally gone below zero due to inadequate pipeline infrastructure; yet, the current rate of negative pricing is unprecedented. On April 24, Permian gas hit a record low of -$9.60 per million British thermal units, while U.S. benchmark gas futures have lingered around $3.
In contrast, gas prices overseas are approximately six times higher, contributing significantly to global inflation pressures that affect electricity, heating, and manufacturing costs worldwide. Goldman Sachs estimates that a 10% rise in global liquefied natural gas prices translates to an 8-basis-point increase in global inflation, hindering economic growth.
The gas scarcity has also impacted fertilizer production. Pablo Galante Escobar, head of liquefied natural gas at Vitol, noted that constrained gas supplies could precipitate a “food crisis.” For instance, Slovakia’s largest fertilizer producer, Duslo AS, has reduced ammonia output due to soaring gas prices, and Indian producers are similarly cutting back following disruptions in Qatari LNG supplies.
Contrastingly, the U.S. economy appears more resilient. Anna Wong, chief U.S. economist at Bloomberg Economics, stated that the divergence in gas prices may lead to unexpected resilience in the U.S. economy. She noted, “Natural gas is more important to the manufacturing sector—particularly chemicals, fertilizers, and electricity—than crude oil.”
Companies like Dow Inc. are capitalizing on low-cost industrial gas, essential for chemical production. With constrained supply chains in Asia and Europe driving up prices, Dow sees opportunities for growth. Karen Carter, Chief Operating Officer, noted during a recent earnings call, “It is leading to increased production in the Americas and providing Dow with the chance to capture new business in Europe.”
Low gas prices are also easing electricity costs, which is significant given concerns regarding the power demands of burgeoning data centers, particularly in the context of rising electricity costs tied to AI development. The fuel’s reliability is drawing data-center developers, including Meta Platforms Inc., to favor natural gas over cleaner alternatives.
Jeremy Knop, chief financial officer of EQT Corp., remarked on the price discrepancies: “That’s a direct result of the scale and efficiency of domestic supply.” However, not all U.S. gas producers are reaping the benefits of low prices. Diamondback Energy Inc., a major Permian explorer, is shifting focus away from lower-priced areas and increasing exposure to markets where prices are higher.
The trajectory of U.S. gas prices may soon shift as several pipeline projects are nearing completion. By the end of 2023, negative pricing in West Texas is expected to decrease. The Blackcomb Pipeline, set to connect the Permian to South Texas, is anticipated to start operations later this year, along with five other projects that will add about 11 billion cubic feet per day of capacity by the end of 2028, representing roughly 10% of total U.S. gas production.
Analysts predict that as new pipelines come online, gas prices in the Permian will rise significantly. However, due to an abundance of shale production and constrained export capacity, U.S. gas prices are expected to remain comparatively low for years, averaging below $4 until at least 2027.
RBC’s Louney affirmed this viewpoint, stating that the combination of plentiful resources and limited export capacity enhances the U.S.’s energy security in a durable manner.
