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Higher Oil, Natural Gas Prices Needed for Stronger Drilling Response, U.S. Operators Tell Kansas City Fed

Oil and natural gas activity expanded “solidly” during the second quarter in much of the Rockies and the northern half of New Mexico, and exploration and production (E&P) companies in the region continue to have strong expectations for future development, albeit at a higher price, the Federal Reserve Bank (Fed) of Kansas City said Friday.

The Kansas City Fed’s quarterly Tenth District Energy Survey provides information on current and expected activity among energy firms located and/or headquartered in the Tenth District, which includes the western third of Missouri; all of Kansas, Colorado, Nebraska, Oklahoma and Wyoming; and the northern half of New Mexico. The 2Q2018 survey ran from June 15-29 and included 34 responses from district firms.

“Regional energy firms had another good quarter and continue to have strong expectations for future growth,” said Oklahoma City-based Fed Branch Executive Chad Wilkerson. “However, the prices needed for significant expansion to occur have continued to rise.”

During the second quarter, the drilling and business activity index decreased slightly to 26 from 37 quarter/quarter, although the future drilling and business activity index expanded to 61 from 50. After increasing during 1Q2018, the capital expenditures and employee hours expectations indexes moderated, but remained well above zero.

Positive readings in the survey generally indicate expansion, while readings below zero generally indicate contraction.

Meanwhile, price expectations for oil fell sequentially to 12 from 31, which a number of companies surveyed attributed to production increases recently announced by the Organization of the Petroleum Exporting Countries (OPEC).

Respondents expect West Texas Intermediate crude oil to price at $67/bbl in six months, at $70/bbl in one year, at $73/bbl in two years and at $78/bbl in five years.

“Supply and demand for oil seem to be in fair balance,” one E&P executive said. “Currently, we see a little more downside pressure than upside due to potential increases in supply from the U.S., Saudi Arabia and Russia.”

Firms were asked about the level of business risk associated with lower operational activity, decreased oil demand, financing constraints, higher OPEC production levels and tighter regulation. Sixty-five percent of respondents anticipated a medium business risk from higher OPEC production levels, while more than 40% listed tighter regulation as a medium business risk.

As for natural gas, price expectations continued to expand moderately, increasing to 21 from 3 quarter/quarter. Natural gas prices were expected to be at $2.85/MMBtu in six months, at $2.90 in one year, at $3.05 in two years and at $3.34 in five years.

“The large supplies of natural gas and good wells keep prices low,” one executive said. Liquefied natural gas “will increase the values once they are online.”

Researchers also found that oil and gas companies were looking for higher prices in order to substantially increase drilling. The average oil price needed by responders in the 2Q2018 survey was $69/bl, with a range of $55/bbl to $90/bl. The average represented an increase of $7.00 from 4Q2017.

The average natural gas price needed was $3.60/MMBtu, with responses ranging from $2.00/Mcf/d to $7.00/Mcf, up one penny from 4Q2017 results.

Meanwhile, companies said problems finding workers and cost inflation could limit near-term growth. Specifically, firms noted difficulties in filling low- and mid-skill positions because of a lack of available or experienced applicants.

Roughly 30% of those surveyed also expected a lack of pipeline capacity for oil and natural gas to limit near-term growth, although most firms also reported strong capital spending plans.

“Permian Basin oil and gas pipelines are at or near capacity, which results in lower price differentials to index prices,” one executive surveyed said. “The threat of production curtailments are driving our business plans in the near future.”

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