Oil rebound's dirty little secret threatens US gas bulls

One of the biggest threats to an extended rally in US natural gas prices is lurking in the oil patch. Gas production in most of the country has dropped amid cost-cutting. Not so in the Permian Basin, the nation's biggest crude reservoir and one of the few places where drilling has remained profitable. Permian drillers led by Occidental Petroleum Corp. and Pioneer Natural Resources Co are pumping more oil as prices rise, pushing natural gas extracted as a byproduct from the West Texas play to almost 7 billion cubic feet a day, Bloomberg Intelligence data show. That's about eight per cent of US supply.

The Permian's resilience may blindside gas bulls who've nudged prices above $3 per million British thermal units for the first time in 16 months, following record demand during a hot summer and rising exports. At the same time, Permian drillers have added 45 rigs in three months, and a new discovery by Apache Corp. in the area promises to chase higher demand with a production surge starting in mid-2017.

"We're drilling for oil in the Permian, but the dirty little secret is that there are also massive gas fields," said Scott Hanold, an analyst at Royal Bank of Canada in Minneapolis, in a telephone interview. "The Permian is going to continue to grow, and it's going to be the 900-pound gorilla."

Apache's discovery in the southern reaches of the Permian underscores the potential. The Houston-based crude producer estimates that two areas of the Alpine High finding can support 2,000 to 3,000 wells at oil prices of $50 a barrel and gas prices at $2.92 per million British thermal units, once production starts in the second half of 2017. Gas fell 5.8 cents to $3.283 on the New York Mercantile Exchange at 12:28 pm New York time.

The Permian is making a swift recovery from a rout in oil prices that battered the energy industry earlier this year, forcing producers to cut output. The 45 rigs added in the region over the past three months compare with just two in the neighboring Eagle Ford shale play during the same period, data from Baker Hughes Inc. show.

Bloomberg