Oil Surges, Gas Plummets Following Iran Deal Breakdown

US President Trump’s announcement this week to pull out of the 2015 Iran deal has sent oil prices soaring, while the price of gas is free-falling in major US hubs.

Crude surged over US$70 on Thursday (May 10), due to rising concerns over a potential global shortage when the US reissues sanctions against Iran, the third largest producer among Organization of Petroleum Exporting Countries members, in the coming weeks.

While the global uncertainty has been a windfall for the oil sector, natural gas excavators are worried the breakdown of the deal will further worsen an already dire situation, in which there are major surpluses and some speculation that gas prices could hit US$0 on certain days.

Part of the problem stems from a boost in oil outputs from key US areas like West Texas’ Permian Basin, America’s most prolific oil reservoir. A growing amount of large scale oil projects and increased oil outputs at existing facilities has created a massive surplus of natural gas in pipelines around the country.

In the Permian Basin, the drilling boom has filled pipelines to capacity and trapped the gas in the region driving prices down to the lowest of any major US hub. The situation could drive prices to US$0 some days reports Bloomberg, forcing companies to stop production or perform a flaring, the process of safely burning excess supply.

Oil and gas production has surged in the region over the last year, and while surging oil demand is behind the increased drill efforts, a similar jump in gas demand has not materialized, creating a glut of gas.

“Gas is getting incredibly cheap again versus oil and refined products,” John Kilduff, of Again Capital LLC in New York, told Bloomberg. “Producers are just going to try to give it away.”

Even though the large rate decrease could mean great news for home owners, it highlights the ripple effect a gas surplus has. Last year, analysts speculated a natural gas overstock now could lead to potential shortages down the road, when gas producers adjust outputs to correlate with decreased demand.

“The industry needs extra supply by the middle of 2022, 2023,”Jordan Cove LNG president, Elizabeth Spomer said last year. “Current low prices and supply surplus sparks a cycle of slowing production amid growing demand, which will contribute to a future output deficit.”

On Thursday (May 10), natural gas was up slightly from its 52-week low of US$2.53 to US$2.76, while oil hit US$71.64 shortly after markets opened, then fell to US$70.97.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.