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Texas Economist Sees Light at Bottom of Oil Well

The economist who compiles the monthly Texas Petro Index (TPI), a barometer of industry health in the Lone Star State, said Tuesday that strengthening crude prices suggest a recovery -- but other segments of the index will remain in decline for a while.

Crude oil prices hit bottom in February, when West Texas intermediate (WTI) crude sold for an average of $27.08/bbl. Since falling to a daily low of $22.75/bbl on Feb. 11, the price of WTI has rallied steadily, surpassing $40/bbl in late April and continuing upward to $44.50/bbl at the beginning of the last week of May, nearly double the low point in February, said economist Karr Ingham

"It appears increasingly likely that we have seen the bottom, and that is certainly cause for some celebration and cautious optimism about where we are headed at this point. But just as other indicators of upstream oilfield activity in Texas continued to increase for several months after prices began to fall in 2014, these same indicators will continue to decline for several months following a change for the better in crude oil prices," Ingham said.

The monthly average of active drilling rigs in April declined to less than 200 for the first time since June 1999 and has continued downward in May, despite higher crude oil prices; the 173-rig count in the last two weeks of May was 81% less than the weekly count in November 2014 just prior to the onset of the rig count decline.

Considering that drilling activity in Texas has declined more than 80%, Ingham described it as a "minor miracle" that only about 32% of jobs have been cut since upstream petroleum industry employment peaked at more than 306,000 jobs in December 2014. According to the TPI, another 6,300 jobs were eliminated in April, leaving upstream petroleum employment at an estimated 207,100, suggesting the loss of nearly 99,000 jobs thus far. "Job losses will continue in the coming months, even assuming we've seen the bottom in the price of crude oil," Ingham said.

A composite index based upon a group of upstream economic indicators, the TPI in April was 164.5, 40.3% lower than in April 2015. Before the current economic downturn, the TPI peaked at a record 313.3 in October and November 2014, which marked the zenith of an economic expansion that began in December 2009, when the TPI stood at 187.4.

Crude oil production in Texas totaled an estimated 105 million bbl, 2.5% less than in April 2015. With oil prices in April averaging $37.51/bbl, the value of Texas-produced crude oil totaled about $3.94 billion, 27.7% less than in April 2015.

Estimated Texas natural gas output was about 710.3 Bcf, a year-over-year monthly decline of about 2.6%. With natural gas prices in April averaging $1.76/Mcf, the value of Texas-produced gas declined 31.2% to about $1.25 billion.

The Baker Hughes Inc. (BHI) count of active drilling rigs in Texas averaged 196, down 53.6% compared to 422 rigs in April 2015. 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.

The number of original drilling permits issued in April was down by 20% compared to April 2015. The number of permits issued this year through April is down by 40% compared to the first four months of 2015 and is the lowest January-April total in the history of the TPI analysis.

An estimated 207,100 Texans remained on upstream oil and gas industry payrolls, down 22.4% from April 2015, and down 32% from a high of about 306,020 in December 2014.

Separately, Dallas-based Comerica Bank's Texas Economic Activity Index declined slightly in March, down 0.2% to 91.9. March's reading is 19 points, or 26%, above the index cyclical low of 72.8. The index averaged 97.7 points for all of 2015, seven and three-fifths points below the average for full-year 2014. February's index reading was 92.1.

"Our Texas Economic Activity Index declined again in March, down for 16 out of the last 17 months. Weakness in the index stems from the reset to the Texas oil and gas industry due to very low commodity prices," said Comerica Chief Economist Robert Dye. "In recent weeks, we have seen some firming in both crude oil and natural gas prices. If the current price regime is stable, with oil near $50/bbl, then we would expect drilling rig counts to stabilize this year, and that overall business investment in crude oil and natural gas projects will stabilize, too, by year end."

"We already see in our Texas Index a slower rate of decline through the first three months of 2016, compared with the second half of 2015. Five out of eight index components were positive for March, including nonfarm employment, exports, unemployment insurance claims (inverted), house prices and state sales tax. Negative index components for March were housing starts, rig count and hotel occupancy."

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