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Crude Awakening if Oil Market Turns Out Like NatGas, Economist Says

In Texas, fewer workers are producing more oil to be sold at lower prices as the Lone Star state remains on track to exceed its all-time production record set in 1972, according to the economist who maintains the industry barometer known as the Texas Petro Index (TPI).

"Oil production is still growing year-over-year, but the margin of growth is narrowing," economist Karr Ingham said Tuesday. "That trend will continue. I still expect crude oil production statewide to peak sometime in the second half of 2015, perhaps even in the third quarter, but the question is will monthly crude oil production go negative compared to year-ago levels by year-end? Not by my calculations it won't, and it looks like we are still on track in 2015 to eclipse the all-time Texas production level achieved in 1972."

In July, Texas crude production was up 15% compared with July 2014, Ingham said. "Meanwhile, the Texas Petro Index continued a precipitous decline set in motion by over-supplied oil markets, dropping 20.6% compared to its year-ago level to 245.5."

Oil production levels in Texas disproportionately affect domestic supplies, so analysts watch Texas oil output closely, Ingham said. "People are looking for reasons to change their thinking on oil prices, but market fundamentals simply do not point to higher crude prices. There might be some short-term ups and downs, but the substantial pressure on price simply has to be regarded as downward, not upward.

"Even if crude oil production peaks and begins to decline, it still has to go down far enough to begin to affect the broader supply-demand imbalance. A rapid drop-off in the second half of 2015 would be a solid move in that direction."

What would be the worst that could happen for crude oil? "A crude oil market post-2014 that looks anything like the natural gas market post-2008: production and supply capabilities that could keep prices relatively depressed for several years into the future," Ingham said.

A composite index based upon a group of upstream economic indicators, the TPI in July was 245.5, 20.6% lower than in July 2014. Before embarking upon the current economic downturn, the TPI peaked at a record 312.0 in October 2014 (the TPI is down by more than 21% compared to then), marking the zenith of an economic expansion that began in December 2009, when the TPI stood at 187.7.

July crude oil production in Texas totaled an estimated 111.2 million bbl, about 14.5 million bbl (15%) more than in July 2014. With crude oil prices averaging $47.93/bbl, the value of Texas-produced crude oil totaled more than $5.3 billion, 44.3% less than in July 2014.

According to the previous monthly TPI, June crude oil production in Texas totaled an estimated 107.6 million bbl, about 15.8 million bbl (17.2%) more than in June 2014, and the value of Texas-produced crude oil totaled more than $6 billion, 35.2% more than in June 2014 (see Shale DailyJuly 29).

For July, estimated Texas natural gas output was about 750 Bcf, a year-over-year monthly increase of 2%. With natural gas prices in July averaging $2.80/Mcf, the value of Texas-produced gas decreased 29.5% to about $2.1 billion.

The Baker Hughes count of active drilling rigs in Texas averaged 369, compared to 892 in July 2014. Drilling activity in Texas peaked in September 2008 at a monthly average of 946 rigs before falling to a trough of 329 in June 2009. In the most recent economic expansion, which began in December 2009, the statewide average monthly rig count peaked at 932 in May and June 2012.

The number of Texans on oil and gas industry payrolls averaged 285,500, according to an analysis of Texas Workforce Commission estimates, about 4.5% less than in July 2014, but nearly 6.4% less than the record of 305,000 Texas oil and gas employees recorded in December 2014.

The nadir of upstream oil and gas industry employment in Texas before the December 2014 record was 179,200 in October 2009. During the previous growth cycle, industry employment peaked at 223,200 in November 2008. "Oil and gas employment data is not seasonally adjusted, but some statistical work with those numbers suggests industry job loss thus far in this contraction of approximately 23,800 jobs," according to Ingham.

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