If crude oil prices top $100 per barrel in 2022, U.S. natural gas markets will not be swamped with gas associated with more oil basin drilling, as has happened in the past, market observers said.

Independent U.S. oil and gas exploration and production companies, or E&Ps, are expected to mostly held to their pledges to keep spending and production flat and send any extra cash they receive from higher commodity prices to lenders and shareholders. But if oil breaks the $100/b mark for the first time since July 2014, some independents might unleash more rigs to capture higher prices in a replay of the industry's boom-and-bust history.

NYMEX pricing for West Texas Intermediate crude has been steadily climbing in recent months and settled at $93.50/b on Feb. 14.

Six years ago, higher prices ignited oil production from new shale plays such as Texas' Permian Basin and North Dakota's Bakken Shale. Along with the oil came free gas that was stripped out of the oil production stream as waste and dumped on the gas markets. This put a cap on benchmark prices, much to the dismay of America's pure-play shale gas drillers.

The oil and gas supply and demand situation is different today than it was six years ago, or 60 years ago, analysts told S&P Global Market Intelligence. Pipelines that carry gas away from oil drilling operations are running out of capacity in key production regions such as Appalachia and the Permian, and LNG exports have created demand for natural gas that was not significant in 2015 and 2016.

"Things are a little bit different this time around," Steve Diederichs, vice president at energy analytics and software firm Enverus, said in a Feb. 16 interview. "I think the biggest kind of near-term constraint is really around the availability of rigs as well as casing pipe in the U.S. Very short-term responses are going to be limited by [material] issues."

Diederichs said while producers could increase Permian oil production marginally without spending much more money, new gas volumes associated with that oil would have trouble getting to market because of a lack of pipeline capacity. Only the Permian Basin has the productive capacity to overwhelm the current gas market, Diederichs said, but the basin is constrained by a lack of outbound capacity.

Stable prices

Privately backed drillers have cranked up production in the face of higher oil prices, but they cannot produce enough associated gas to significantly move prices, said Matt Murphy, director of E&P research at energy investment bank Tudor Pickering Holt & Co.

"We'd actually suggest that supply is far more inelastic to price than it's ever been as a result of the capital discipline employed by public independent E&Ps," Murphy said in an email.

Artem Abramov, the head of shale research at energy consulting firm Rystad Energy, said reduced pipeline capacities out of high-volume shales like the Permian and Appalachia will support gas prices, no matter what oil does.

"The natural gas landscape in the U.S. changed a lot in the last three to four years," Abramov said in an email. Appalachia's pipelines are stuffed, and the play can only grow 2 Bcf/d over the next five to seven years, while the Permian needs another 2 Bcf/d of takeaway before it reaches a bottleneck, according to Abramov.

Global factors

Any additional associated gas volumes will be a mild drag on Henry Hub gas prices, RBN Energy LLC managing editor and analyst Sheetal Nasta said. "But there are gas-specific dynamics that may eventually override or dampen the bearish effects on Henry Hub, namely when growing supply areas like the Permian and Appalachia start to hit their takeaway capacity walls and constrain gas from getting to where the demand growth is along the Gulf Coast."

LNG exports, macroeconomic factors, and world events will have far more influence on U.S. natural gas prices than in previous years, RBN's CEO David Braziel said.

"I think the more significant factor is that a rising tide is lifting all commodity prices," he said. "A big part of that is geopolitical and that we're more connected than ever via exports. Long term, there's a price premium associated with the political and market uncertainty regarding decarbonization pressures that's affecting both crude and gas."