Why Lower Oil Prices Will Boost Natural Gas
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Many years ago, when we were researching silver mining companies, I was fascinated to learn how insensitive production and consumption were to prices. Unlike gold, which is mostly held as an investment, silver has many industrial uses. Consumer electronics represents over a third of demand. Silver has few good substitutes and is a comparatively small part of the total cost of the products it supports. So manufacturers just pay what they must.
Most silver is produced as a byproduct of either lead, zinc, or gold. As such, the price of silver isn’t a major influence on output. The result is that silver volumes aren’t that sensitive to price, which is why its price volatility is generally higher than for other precious metals such as gold.
There’s an interesting analogy with oil and gas in the US. Price forecasts for crude are bearish. The Energy Information Administration (EIA) expects Brent to average $51 a barrel next year. Goldman Sachs sees oil in the low 50s by H2'26. Brent is currently around $67.
The EIA sees only a modest impact on production, with US output falling from 13.4 Million Barrels per Day (MMB/D) this year to 13.3 MMB/D in 2026. As we noted in last week’s blog post, the EIA’s forecast production drop looks optimistic.
Upstream companies are preparing for something more dramatic. ConocoPhillips says it may lay off up to a quarter of its workforce by the end of the year. Chevron expects to cut by 15%-20%. Perhaps the analysts at the EIA are wary of publishing forecasts that will antagonize the White House.
Oil wells in the Permian basin in west Texas and New Mexico produce associated gas, which means the oil/gas combination that comes out of the ground has to be separated. The oil is what they want. The region has been chronically short of gas infrastructure for years, although demand from data centers and LNG export terminals has recently spurred several new pipeline projects.
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This raises an interesting problem. If crude output drops farther than the EIA expects, natural gas output from the Permian will fall, too. This will occur just as demand from data centers and LNG export terminals is ramping up. It’s why the EIA expects the Henry Hub natural gas benchmark to reach $5 per Million BTUs (MMBTUs) next year, compared to $3 currently.
In a quirk of the relationship between the two commodities, softness in crude oil could drive natural gas prices higher if E&P companies respond by cutting oil output, since in the Permian this would lower gas output, too.
Just as silver production can be driven by the price of gold where they’re mined together, gas output in the Permian can depend on the price of oil.
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This will create an opportunity for drillers in the Marcellus and Utica shales in Appalachia which is rich in gas and natural gas liquids, therefore responsive to gas prices.
Some have warned of a glut of US LNG supply, but importing countries are building regassification terminals, too. The capacity of importers is on pace to be roughly 2X the world’s liquefaction capacity. So if every import terminal operated half the time, 100% of the world’s LNG export terminals would be in use.
EQT, a gas producer, just signed a deal with NextDecade. Normally it’s the buyers of LNG who contract for liquefaction capacity, but in this case a producer wants to lock in the ability to send their US-sourced natural gas overseas.
Weak oil prices have hurt sentiment across the energy sector. Even though midstream infrastructure has limited sensitivity to commodity prices, this has probably given some potential buyers pause before committing capital. The positive natural gas outlook hasn’t provided a sufficient counterweight, perhaps because regional gas prices vary widely since transportation costs can exceed the Henry Hub benchmark.
By contrast, moving oil costs a small fraction of the price of a barrel. There’s a global crude price that commands attention while movements in regional gas prices don’t resonate as much.
US natural gas prices are low by global standards. Even at $5 per MMBTUs the spread to European and Asian LNG benchmarks will sustain the economics of gas exports to those regions.
As for data centers, the other source of demand growth, they’re most concerned with reliable power and how quickly it can be delivered. The newest data centers are seeking uptime of all but three seconds a year (i.e. to run 99.99999% of the time). Solar and wind, with their 20%-35% capacity utilization, are hopeless in this respect.
Oil and gas prices in the US look set to diverge.
We have two have funds that seek to profit from this environment:
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