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By: Editorial Team, StoneX Media
America's record surge in crude oil production has created an awkward byproduct in the Permian Basin. Permian natural gas prices have turned negative because the region produces far more associated gas than its pipelines can carry away, leaving producers to pay others to take it off their hands. The gas is not the prize, crude oil is, yet every barrel pulled from the ground brings up a stream of natural gas that has to go somewhere. When there is nowhere for it to go, its local price can collapse below zero.
Alex Hodes is Director of Energy Market Strategy at StoneX, where he tracks U.S. and global supply flows, inventory balances, refinery run rates, and the takeaway and processing dynamics that connect crude production to natural gas markets like the Permian.
Every barrel of crude oil pulled from the Permian Basin comes with a flood of associated natural gas that producers have to move off site. The gas is a consequence of the hunt for oil rather than the target, and it needs to be routed to processing plants or liquefied natural gas terminals to hold any value. According to Hodes, "when drillers are drilling for crude oil, they produce a lot of excess natural gas, and they need to take this natural gas away to either be processed or converted into LNG". As a result, the economics of the Permian depend not only on the price of crude oil but on whether there is enough pipeline space to carry the gas that comes up with it. When that space runs short, the excess gas turns from a bonus into a liability.
"The natural gas pricing you're seeing in the Permian has hit negative levels, so people are paying people to take it off their hands", Hodes said. Permian natural gas prices have turned negative because the pipelines that carry gas out of the basin, known as takeaway capacity, have filled up faster than new lines can be built. When there is more gas than the system can move, the only way to keep the crude flowing is to give the gas away or even pay to offload it. That leaves producers absorbing a cost on one product simply to keep selling the other, a squeeze that tightens whenever drilling activity climbs.
The Permian Basin has run into this natural gas takeaway constraint before, only to reach it again as production climbs. A few years ago the same bottleneck pushed regional gas prices down until operators added new pipelines to relieve the pressure, and that relief has since been used up. The pattern matters because it signals that infrastructure buildouts buy time rather than permanently solve the problem, and each fresh wave of drilling can outrun the last expansion. Hodes, reflecting on how familiar the situation has become, noted that "you saw it several years back before they added additional natural gas takeaway capacity in the Permian Basin, and now you're seeing that running into that constraint as well".
Negative prices mean sellers pay buyers to take the gas rather than receiving payment for it. In the Permian Basin this happens when so much associated natural gas is produced alongside crude oil that there is not enough pipeline capacity to move it, so producers offload it at a loss to keep their oil wells running.
The gas has to be carried away by pipeline to be processed or converted into liquefied natural gas. When that takeaway and processing capacity is full, the gas has no outlet, which is what can drive its local price below zero.
Drilling for crude oil in the Permian Basin brings up large volumes of associated natural gas as a byproduct of the process. Producers focused on selling oil still have to manage that gas, which becomes a problem when the infrastructure to move it runs short.
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--- Written by Gus Farrow, Senior Manager, StoneX Media
--- Expert: Alex Hodes, StoneX Director Energy Market Strategy
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America's oil boom has an awkward side effect in the Permian Basin, where the natural gas that surfaces alongside crude has become something producers struggle to get rid of. With takeaway capacity stretched, Permian gas prices have fallen below zero, leaving drillers paying others to haul the gas away.
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