Pressures Apparent from Weak Commodities, Dallas Fed Finds

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Many of the upstream services firms working in the Permian Basin were hurt by lower natural gas prices, while break-evens in the oil patch held steady amid a market lull, the Federal Reserve Bank of Dallas found.

The U.S. shale sector is evolving as production trends change the pressure in the wells. Basins tend to yield more associated gas as pressures drop, meaning areas such as the Permian and the Eagle Ford Shale are the driving force behind U.S. gas production gains.

Output in the Appalachia Basin, the largest inland source of natural gas in the U.S., is expected to decline next year. In the Permian, however, upstream services firms are vulnerable to low prices for Waha, the benchmark for regional natural gas.

"Rising associated gas production (natural gas co-produced alongside oil), limited takeaway capacity within the Permian Basin, as well as delays in the startup of new capacity--the Matterhorn gas pipeline--have driven the exceptionally weak prices," Friday's report from the Dallas Fed said.

The Waha price went into negative territory several times this year due to the lack of takeaway capacity for the increased level of associated gas coming out of the Permian. Matterhorn is designed for a peak capacity of 2.5 billion cubic feet per day (Bcf/d), but is only about half full now.

"Now, the issue is with demand more so than the lack of takeaway capacity," said Maria Sanchez, a natural gas products and senior analyst at the energy arm of Industrial Info.

Broader market prices have been suppressed for much of the year amid economic headwinds from lingering inflationary pressures. Henry Hub, the U.S. benchmark for the price of natural gas, is trading in the range of $3 per million British thermal units (MMBtu). That, however, is inflated relative to recent levels due to the onset of winter in North America.

The Dallas Fed reported that nearly half of those surveyed on the market said they expected at least a slightly negative impact from weak prices. Only about 15% expected a severe hit, however.

Elsewhere, the Dallas Fed found it may be getting a bit more expensive in the southern oil patch. The price at which drillers break even in the region was about $65 per barrel for West Texas Intermediate, the U.S. benchmark for the price of oil. That's $1 higher than this time last year.

Like natural gas, oil prices are on the decline, though much of the headwinds stem from concerns that tariffs proposed by U.S. President-elect Donald Trump would undermine domestic growth.

The Energy Information Administration (EIA), the data arm of the U.S. Department of Energy, expects Henry Hub to improve 33% from this year's average to settle in the $3/MMBtu range next year. The same, however, cannot be said for oil.

"In the short term, the combination of U.S. tariff threats, elevated OPEC spare capacity and rising production elsewhere--not least in the US, where output has reached a record 13.5 million barrels per day--has reduced the likelihood of an upside price movement," Ole Hanson, the head of commodity strategy at Saxo Bank in Denmark, wrote in a Friday newsletter.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).