Oil and Gas Markets Diverge as Permian Production Grows

WTI crude oil has been trading around $90 per barrel, while Henry Hub natural gas futures settled at $3.03 per million Btu on September 30. Despite coming from the same wells in the Permian Basin, the economics of oil and gas have diverged significantly. The U.S. Energy Information Administration (EIA) now forecasts Henry Hub to average $3.28 per million Btu in 2027, down from its January prediction of $4.59, due to slower-than-expected demand growth.

Most Permian gas is associated gas, produced alongside oil. The gas-to-oil ratio in the region is rising, meaning more gas is extracted as oil drilling continues. Nationally, dry gas production is near record levels, with EIA expecting it to reach 115.9 billion cubic feet per day by 2027. However, earlier this year, limited pipeline capacity caused prices at the Waha hub to stay negative for 47 consecutive days.

Natural gas storage levels are currently healthy, with inventories 2.4 percent above the five-year average. EIA projects storage will end the injection season at 3,969 billion cubic feet, 5 percent above the five-year average. Meanwhile, LNG export demand continues to grow, with EIA expecting U.S. gross LNG exports to average 19 Bcf per day by 2027.

The disconnect between oil and gas prices is testing the terms of many contracts. Agreements pricing off different hubs or using formulas can lead to significant discrepancies. Operators must carefully review pricing, curtailment, and termination provisions, especially as drilling activity shifts toward oil-focused rigs. The next EIA Short-Term Energy Outlook, due October 6, will provide further clarity on inventory levels and price projections.