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Federal Report Finds Energy Industry Gaining Strength

The national economy and the energy industry are both gathering strength overall and face an optimistic future in the near term despite some lingering uncertainties, according to a report released Wednesday by the Federal Reserve Board.

The latest edition of the "Beige Book" -- published eight times a year with data provided by the 12 Federal Reserve Districts -- also reported that the number of oil rigs operating in the Gulf of Mexico was about half the number engaged in drilling before the Macondo well blowout. Despite this, the issuance of deepwater drilling permits resumed in the Atlanta district in late February for the first time since the accident.

"Industry contacts noted that the recent international events, including Japan's nuclear crisis and the unrest in the Middle East, have added additional uncertainty to their outlooks for investment and hiring," the report said.

The Atlanta district also reported that during February and March, oil companies were building up their crude oil inventories in anticipation of the summer driving season.

Drilling activity increased in both the Dallas and Kansas City districts, with exploration shifting away from natural gas and toward crude oil, whose prices spiked in late February and March due to "political and economic instability in some producer nations," which was expected to continue. Texas accounted for a significant part of the increase in the U.S. rig count.

"The trend toward more oil-directed drilling continues," the report said. "Although fewer rigs are directed to natural gas, those drilling for gas provide high levels of activity for service companies, according to respondents."

Natural gas prices were stable at the end of the winter heating season, but were expected to fall with the arrival of warmer weather.

The Cleveland district reported that oil and gas output from conventional wells remained fairly steady during the past six weeks and was not expected to change in the near future. Spot prices for natural gas varied from holding steady to trending down, while wellhead prices paid to independent oil producers posted a modest increase.

In the Minneapolis district, oil exploration activity increased from mid-February to late March. Meanwhile, demand for crude oil was slightly higher from a year ago, according to the San Francisco district. Extraction activity for natural gas expanded, which consequently increased supply and caused prices to fall.

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