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Texas Economist Less Optimistic on Oil Prices

As oil and natural gas prices have declined, Texas production has been increasing, according to the economist who compiles the Texas Petro Index (TPI), and that's a problem.

Unlike the last contraction the industry experienced -- which was driven by recession-related demand reduction -- this pullback comes from too much supply.

"Virtually all components of the TPI are posting deep year-over-year declines, with the notable exceptions of crude oil and natural gas production, which continue to expand..." said Karr Ingham, the economist who developed the TPI and maintains it for the Texas Alliance of Energy Producers. "Oil production simply has not declined in response to the clear market signal of the steep decline of crude oil wellhead prices..."

The June TPI, a composite index of oil/gas upstream activity in the Lone Star State, has declined 18% since hitting a peak last October at 312. It is down 17% compared with June 2014.

Despite declines in operating drilling rigs and the number of drilling permits issued, Texas production remains stubbornly strong. "...[I]t seems clear at this point that Texas crude oil production in 2015 will surpass its all-time high of 1.263 billion bbl in 1972, with estimated annual production in 2015 totaling 1.284 billion bbl."

There's less drama in the natural gas world, but the plot is the same: low prices with too-strong production. According to the TPI, the gas wellhead price during the first six months of 2015 averaged $2.70/Mcf, 44% less than the average of $4.62/Mcf through the first six months of 2014. However, Texas gas output from January through June totaled 4.3 Bcf, which is 3% more than during the same period a year ago.

Output growth in gas is driven by production associated with oil, Ingham said. "For most of the last five years, less than 10% of rigs at work in Texas were drilling primarily for natural gas, and yet Texas natural gas production has continued to increase over that period of time," Ingham said.

There's more price pain to come, Ingham said during a presentation in Houston Monday.

"In 2009 on the heels of the heels of the natural gas price collapse, Texas producers had a place to go: to crude oil-focused drilling and production with crude oil prices recovering to over $100/bbl," Ingham said. "If natural gas and crude oil prices remain relatively depressed, we may be looking at a longer-term scenario with oil prices in the $50-60/bbl range rather than $75/bbl, $80/bbl or higher."

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