Negative West Texas Gas Prices Reveal Mismatch in Global Energy

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(Bloomberg) — A dislocation in global energy supplies means that even as buyers in some parts of the world are desperate to secure gas, there’s so much extra production in Texas that producers are burning it off as quickly as they’re allowed. 

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In West Texas, oil and natural gas are produced together. With crude prices surging on the supply disruptions sparked by the war in Iran, many drillers are happy to keep output high. But meanwhile, the region lacks the infrastructure to move all of the gas out and into the export market. As a result, local gas prices have plunged to negative levels. 

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Prices for next-day delivery at the Waha gas trading hub in the Permian Basin — home to roughly a quarter of US gas production — are trading well below zero. That means sellers are being forced to pay buyers to secure access to scarce pipeline capacity. Last week, Waha saw its lowest weekly average spot price on record.

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The Waha market’s collapse underscores a pressing issue in global energy: Even when there’s enough raw-material output, many parts of the world lack the critical supply chains necessary to ship product where it’s needed. As Texas gas tumbles, European gas prices have surged after an attack on the world’s largest liquefied natural gas plant in Qatar. The disruption will likely tighten global supplies.

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Texas producers that don’t want to pay to offload their gas have two options. One: halt production — an undesirable and costly choice, especially as the war in Iran has sent the US oil benchmark to near $100 per barrel. Or otherwise, ask the Texas state oil and gas industry regulator for permission to flare — burn off — excess gas.

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Flaring events this year have spiked to highest monthly seasonal levels in at least five years, according to Josh Garcia, an analyst at Energy Aspects.

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Gas supplies could become even more burdensome for Permian operators in the coming months, according to some analysts.

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Waha spot prices last week reached as low as -$9.75 per million British thermal units, according to traders. The price could drop as low as -$10 as more pipeline operators perform seasonal maintenance, removing more of the already-scarce takeaway capacity, Garcia said. 

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Even at that low price, most Permian production would remain economical, as oil profits more than outweigh losses from gas, Garcia said.

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—With assistance from Zachary R. Mider.

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