Diverging Oil and Gas Prices Test Contract Terms in Permian

Oil prices have recently hovered around $90 per barrel, while natural gas futures settled at $3.03 per million Btu on September 30. This price divergence is notable because many wells, particularly in the Permian Basin, produce both oil and gas. The U.S. Energy Information Administration (EIA) forecasts Henry Hub natural gas to average $3.43 in 2026 and $3.28 in 2027, a significant drop from its January prediction of $4.59 for 2027 due to adjusted expectations for demand and supply growth.

Most natural gas in the Permian is associated gas, meaning it is a byproduct of oil drilling. The gas-to-oil ratio in the Permian is rising, with forecasts indicating nearly 4,200 cubic feet of gas per barrel of oil by 2025. Nationally, dry gas production is near record levels, with EIA projecting averages of 111.7 billion cubic feet per day in 2026 and 115.9 billion cubic feet per day in 2027.

Storage levels are currently healthy, with working gas in storage at 3,415 billion cubic feet as of September 25, slightly above the five-year average. EIA anticipates inventories to reach 3,969 billion cubic feet by October 31, marking a 5 percent increase over the five-year average. Despite growing LNG demand, which EIA expects to average 17 Bcf per day in 2026 and 19 Bcf per day in 2027, the agency has revised its price forecast downward.

The discrepancy between oil and gas prices is testing the terms of existing contracts. Many agreements were written for a different price environment, and key provisions related to pricing, delivery, and payment are now under scrutiny. Operators must carefully review contract language to avoid disputes, particularly regarding pricing indices, curtailment rights, and long-term supply agreements.