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Texas Oil/Gas Barometer Poised For Record Decline

An index that measures the health of the Texas oil/natural gas economy declined for the 11th straight month in October and is off more than 32% from its year-ago level, the economist who administers it said, adding that the worst is likely yet to come.

The Texas Petro Index (TPI) has declined 100 points over the last 12 months, said economist Karr Ingham, as the mantra for commodity prices of "lower for longer" has become "even lower, for longer still." All of the indicators that comprise the TPI showed declines in October -- except for production of oil and natural gas.

"Amid all the chatter about when crude oil production may have peaked and rolled over in Texas and the U.S. the sentiment about prospects for recovery has become increasingly pessimistic -- which is to say, realistic -- as the year has progressed," Ingham said. "It seems the most optimistic outlooks expect the beginning of meaningful recovery to appear no sooner than the latter half of 2016. But we simply do not know how that will look at this point."

In October the TPI hit 212.3 after a steady fall from a record of 313.2 one year ago.

Although the TPI showed oil production in Texas peaked in mid-2015, Ingham said statewide crude output in October still exceeded the volume of oil recovered in October 2014, "and the amount of crude oil in storage continues to rise rather than decline."

Other indicators -- such as rig activity, permitting, wellhead prices  and industry employment -- continued declining through October. And the picture has worsened even since then, Ingham said, as the price paid to producers for crude oil has continued to fall along with weekly rig counts.

"Until crude oil production actually begins to decline meaningfully and the volume of oil in storage begins to contract rather than expand, there is little reason to expect prices to recover and activity levels to begin to increase," Ingham said.

Considering the extent of the TPI decline in the past year, Ingham said, "At this point it has become apparent that the [TPI] low point of 187.5 in the previous economic cycle (prior to the expansion that began in January 2010) is in jeopardy."

Ingham said the TPI is "almost certain" to fall below that trough in coming months. "In fact, if the TPI loses at least 40% of its value -- as we predicted in January -- it would mark the first time the low point of a contraction falls below the nadir of the previous cycle.

"At this point, the end of the current contraction is not known and cannot be foreseen. But we know this much: it will be the deepest and longest in the history of the TPI, which is based in January 1995."

According to Ingham, Texas estimated crude oil production in Texas totaled nearly 107 million bbl, about 7 million bbl (7.1%) more than in October 2014. With crude oil prices averaging $42.90/bbl, the value of Texas-produced crude oil totaled about $4.59 billion, 43.3% less than in October 2014.

Estimated Texas natural gas output was nearly 753.4 Bcf, a year-over-year monthly increase of 1.7%. With natural gas prices in October averaging $2.31/Mcf, the value of Texas-produced gas decreased 36.7% to about $1.75 billion.

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, according to Baker Hughes Inc. It's well under half that now (see Daily GPIDec. 4).

The number of Texans on oil and gas industry payrolls averaged an estimated 250,230, according to Ingham's interpretation of Texas Workforce Commission (TWC) Quarterly Census of Employment and Wages data. That's about 17.8% less than in October 2014, in which the TPI estimate was based upon the TWC's Current Employment Statistics (CES) series (see Daily GPINov. 13).

According to calculations based upon CES data, a record 306,000 Texans held oil and gas industry jobs in December 2014. Using the CES as a benchmark, Ingham calculated the nadir of upstream oil and gas industry employment in Texas before the December 2014 record to be 175,700 in October 2009. During the previous growth cycle, industry employment peaked at 219,900 in October 2008.

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