Natural Gas Gains as Falling Oil Prices Threaten U.S. Drilling Expansion

The global energy market is entering a pivotal phase, with natural gas prices surging as falling oil prices create a ripple effect across the U.S. drilling sector. While crude oil prices for Brent averaged $68 per barrel in 2025—a steep drop from earlier forecasts—this decline is now casting a shadow over drilling activity. The interplay between oil and gas markets has never been more critical. Here’s why investors should pay close attention.

Oil Prices: A Downward Spiral Driven by Geopolitics and Supply Gluts

The U.S. Energy Information Administration (EIA) projects that Brent crude prices will average $68/b in 2025, down sharply from its March 2024 forecast of $74/b. This downward trajectory is fueled by a toxic mix of trade wars, slowing demand, and rising supply.

• Trade Policy Uncertainty: U.S.-China tariffs, imposed in early 2025, have dampened global trade and economic growth, reducing demand for oil. The EIA now expects global oil demand growth to stall at just 0.9 million barrels per day (mb/d) in 2025, down 0.4 mb/d from earlier estimates.
• OPEC+ Volatility: OPEC+’s decision to unwind 2.2 million b/d of production cuts by mid-2025 has flooded the market with crude, exacerbating oversupply fears.
• Non-OPEC+ Growth: U.S. shale output, Canadian oil sands, and new production from Guyana and Brazil are further tilting the supply-demand balance.

The Drillers’ Dilemma: Cost Pressures and Capital Discipline

The Dallas Fed Energy Survey for Q1 2025 reveals a drilling sector under strain. Despite modest growth in oil and gas production, firms face rising costs and uncertainty:

• Breakeven Barriers: The average breakeven price for new oil wells has risen to $65/b, barely above the 2025 EIA forecast of $68/b. Smaller operators require prices closer to $75–$80/b to justify new projects.
• Input Costs: Steel tariffs and inflation have pushed input costs for oilfield services to a 30.9 index reading—the highest since 2022. Lease operating expenses for E&P firms jumped to 38.7, reflecting higher labor and compliance costs.
• Capital Hesitation: E&P firms’ capital expenditure plans for 2026 have been trimmed to an index of 18.2, down from 24.1 in early 2024.

The result? A slowdown in drilling activity. The EIA estimates that U.S. crude production growth will ease to 0.8 mb/d in 2025, down from 1.5 mb/d in 2024.

Natural Gas: A Bright Spot in the Energy Mix

While oil struggles, natural gas is emerging as a beneficiary of reduced drilling activity. Here’s why:

1. Associated Gas Declines: Falling oil drilling will reduce production of associated gas, a byproduct of oil wells. The EIA projects that U.S. natural gas production could grow by just 1% in 2025, down from 2% in 2024.
2. LNG Export Momentum: U.S. LNG exports are expected to hit 15 billion cubic feet per day (Bcf/d) in 2025, driven by new infrastructure like the Plaquemines LNG terminal. This will tighten domestic supplies, supporting prices.
3. Pipeline Constraints: The Permian Basin’s gas takeaway capacity remains strained, with Waha Hub prices dipping to negative levels due to oversupply. New pipelines like the Matterhorn Express (set to open in 2026) could alleviate this, but delays risk prolonging regional price volatility.

Investment Implications: Playing the Gas Rally

For investors, natural gas presents a compelling opportunity—if risks are managed.

• Supply and Demand Tightening: Reduced drilling and strong LNG demand could push Henry Hub prices above $4.50/MMBtu by year-end 2025, up from $3.19 in 2024.
• Midstream Plays: Companies like Enbridge (ENB) and Williams Companies (WMB), which operate pipelines and storage assets, stand to benefit as bottlenecks are resolved.
• Gas-Specific ETFs: The United States Natural Gas Fund (UNG) offers exposure to futures prices, though investors should be cautious of contango-driven losses.

Risks to the Thesis

• Oil Price Rebound: A geopolitical shock (e.g., Middle East conflict) or OPEC+ cuts could lift crude prices, reigniting drilling activity and increasing gas supply.
• Regulatory Overreach: California’s permitting delays and federal climate policies could disrupt production plans.
• Infrastructure Delays: Pipeline projects like Matterhorn may face permitting hurdles, prolonging regional oversupply.

Conclusion: Gas as the New Safe Haven?

The interplay between falling oil prices and constrained drilling activity is creating a tailwind for natural gas. With global LNG demand surging and U.S. supply growth slowing, investors have a clear path to capitalizing on this shift.

The EIA’s data underscores the trend: natural gas prices are poised to rise by over 40% in 2025 compared to 2024 averages. Meanwhile, the Dallas Fed survey highlights that 78% of energy firms expect gas prices to increase further over the next year.

For those willing to navigate the risks, natural gas offers a compelling hedge against energy market volatility. As one E&P executive noted, “The days of $2 gas are over.” Investors would be wise to take note.