Drilling boom in the Permian may be bad news for gas bulls

By Naureen S. Malik on 3/13/2017

NEW YORK (Bloomberg) -- A drilling surge in America’s hottest oil play may prove to be a pitfall for natural gas bulls.

As explorers extract crude from the Permian shale in West Texas, they’re also producing gas. A jump in the number of rigs operating in the basin is adding to the so-called fraclog, or the number of drilled wells that are waiting to be connected. That’s a sign that gas output from the region will jump by about 25% over the next year, threatening to send prices below $2/MMbtu, according to Tudor Pickering Holt & Co.

Gas is already this year’s worst performer among major commodities, and the prospect of a torrent of supply from the Permian means 2018 may not be much brighter for gas bulls. Output from the basin would augment production from the Marcellus shale in Pennsylvania and West Virginia, which is expanding as new pipelines carry the fuel to major markets.

“It’s a real risk that a year from now that prices could be below $2,” said Brandon Blossman, a managing director at Tudor Pickering Holt in Houston. “You have this unfortunate confluence of Permian production ramping right into the teeth of a lot of new takeaway capacity in the Northeast.”

Gas production from the Permian may total 7.945 Bcfgd in April, up 15% from a year earlier. The basin’s oil and gas rigs climbed for nine straight months through February, more than doubling from the 2016 low in May, the U.S. Energy Information Administration said in a report Monday. The backlog of drilled but uncompleted wells ballooned 43% during the same period.

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