Israel-Iran conflict unlikely to impact US associated gas production, prices

US associated gas production and benchmark Henry Hub prices will likely see no material impact from the Israel-Iran conflict, despite a continued risk premium reflected in the crude oil markets.

Over the past two weeks, global crude prices surged as Israel launched a major air offensive on Iran over the latter's alleged nuclear weapons program.

Amid mounting alarm over potential supply disruptions, especially for crude in the Persian Gulf and Iran, WTI crude prices climbed to over $75/b -- up about $10-$15/b from early June, data from S&P Global Energy showed.

On June 23, US President Donald Trump announced a tenuous ceasefire agreement between Israel and Iran, sending crude prices tumbling to around $68.50/b. On June 24 and June 25, however, NYMEX crude prices appeared to stabilize around $65/b, according to data from CME Group and Energy.

Although the rally was short-lived, it did raise questions about how US crude oil producers might respond to higher prices.

In a social media post on June 23, Trump appeared to be addressing the US oil industry while calling on the US Department of Energy to "DRILL, BABY, DRILL." Trump's remarks came even as crude prices were in retreat.

For the US gas market, drilling and production decisions made by domestic crude producers can and often do have profound implications for US gas supply and benchmark prices.

As a co-product of crude oil production, US associated gas output comes primarily from the Permian Basin, as well as other major oil-focused shale plays like the Eagle Ford, the Bakken, the SCOOP-STACK and the Denver-Julesburg. According to the US Energy Information Administration, associated gas production accounted for nearly 37% of total US production in 2023.

For the US gas market, higher crude prices could fuel an increase in associated gas production and potentially weigh on benchmark Henry Hub prices -- presuming that crude-weighted operators respond to the higher WTI price signal by increasing their oil output.

US growth unlikely

Although the risk of a reescalation in the Israel-Iran conflict has kept crude prices in the mid-$60s/b -- up from the low-$60s in early June, that change is unlikely to motivate many US crude oil producers to increase output -- especially considering the continued production hikes approved by OPEC+ members in recent months.

Unless WTI crude oil prices consistently hold up above $70/b, oil-directed activity should be flat to lower, according to Svetlana Tretyakova, an oil analyst with Rystad Energy.

"Capital allocation is being guided by full-year and mid-term planning, not short-term price moves," Tretyakova said. "Unless WTI moves sustainably above $70 for at least a quarter, our base case holds: production flatlines before declining in 2026 and beyond."

On June 25, as the tentative ceasefire between Israel and Iran continued to hold, NYMEX WTI crude prices were up about $1.50/b on the day to around $65.50/b, data from CME Group showed.

"With global [oil] supply unimpeded, we would expect the risk premium to continue to unwind, and for crude to potentially push lower if the US loosened sanctions on Iran's crude industry," Matt Portillo, market analyst with TPH Energy Research, said in a June 23 market note.

"Lower crude prices remain a priority for [Trump] with incremental Iranian barrels only piling onto our already bearish outlook," Portillo said.

Guidance

On first-quarter earnings calls, more than a month prior to the Middle East conflict, both US and Canadian oil producers had continued to signal restraint in their planned capital spending -- a course that seems unlikley to change. Some producers also announced cuts to their drilling and completion programs. So far, efficiency gains have helped keep output stable to modestly higher this year.

From January to May, crude oil production in the Permian Basin grew from about 6.4 million b/d to an estimated 6.6 million b/d, according to data from Energy.

In the latest earnings round, more than a handful of oil-weighted producers said they were planning spending and activity cuts in the Permian -- a key basin for associated gas production that accounted for over 60% of the US total in 2024.

Among those planning reductions were Matador Resources, Occidental Petroleum, Diamondback Energy, EOG Resources and Coterra Energy, all of whom said they were planning some combination of lower spending, rig cuts and/or reduction to their well-completion programs.

Crude oil producers have kept their promise. Since the start of the second quarter, the Permian Basin rig count has continued to decline from over 290 rigs to an average 275 over the past four weeks.