TMT: How Oil Impacts Natural Gas Prices

Video Transcript

The coronavirus has had a huge impact on the price of commodities, with oil being the primary media focus in recent months. But did you know that approximately 16 percent of natural gas harvested in the United States comes from oil wells?

In this week’s Two-Minute Tuesday, we’re going to talk about how the relationship between oil and natural gas drives domestic energy prices and give you some tips to control your risk.

How are oil and natural gas related?

If a company produces crude oil in the United States, chances are they also produce natural gas. The two commodities are related because natural gas can be a byproduct of oil drilling. This is called associated gas — otherwise known as natural gas that’s associated with oil production.

With a nationwide average of 16 percent of natural gas (and as much as 40 percent in some areas of the country) coming from oil, it is safe to say that a good chunk of domestic natural gas production is reliant on oil.

What happened with oil prices?

Oil prices absolutely plummeted because of a perfect storm in March and April of this year. Plunging demand due to the coronavirus coupled with an OPEC disagreement on production cuts cause the collapse of oil prices.

There are two consequences of low oil prices as they relate to natural gas:

  1. The immediate impact is it’s no longer profitable to harvest oil domestically and the associated natural gas that comes with it. Oil drillers in the US have higher operating costs and a higher break-even point than drillers elsewhere in the world. The 16 percent value of natural gas coming from oil is reduce or, in some extreme cases, eliminated.
  2. In a longer-term view, sustained low oil prices will cause future development of oil and associated natural gas resources to be cancelled or postponed. This is really a balancing effect of supply and demand. So the longer oil remains low, the larger the potential impact it will have on future supply levels of natural gas.

We’ve seen oil demand come back here in July, almost reaching the same levels as 2019. The Wall Street Journal is also reporting that the worst effect of the coronavirus on global oil demand have passed but will continue to echo throughout the rest of 2020 and beyond. With resurgent cases we’re seeing in the south and talk of additional business closures, this remains to be seen.

How does this impact you?

So, what should you do with this information?

If your natural gas agreement is expiring within the next 18 months, you should absolutely be reviewing your options for renewal. Prompt month prices hit 25-year lows in early July 2020.

If you’re locked farther out, I would also encourage you to review options for extending your natural gas agreement. With the historical low point we’re currently at coupled with risks to long-term production, now may be the time to take some of that risk off the table.

Thanks for watching! If you’d like to review your options for natural gas, my team and I would be happy to help. If you enjoyed this video, please like, comment, and share below.

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