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Dallas Fed Energy Survey Sees Rising Optimism, Trending to ‘Goldilocks Stage’

Oil and natural gas activity across Texas, northern Louisiana and southeastern New Mexico gained momentum during the fourth quarter, the Federal Reserve Bank’s Dallas arm said Thursday.

The business activity index is measured quarterly in the Dallas Fed Energy Survey, offering the broadest measure of conditions facing Eleventh District energy firms. The index climbed to 38.1 from 27.3 in 3Q2017, driven by a surging exploration and production (E&P) sector.

“Positive readings in the survey generally indicate expansion, while readings below zero generally indicate contraction,” economists noted. “All indexes in the latest survey reflected expansion on a quarterly basis.”

Said one E&P executive, “The oil industry in the Lower 48 states appears to be in the ‘Goldilocks stage’ -- not too strong, not too soft, just right -- which incents everyone to be efficient.”

Data were collected for the survey from Dec. 13-21, with 134 energy firms responding. Of the respondents, 77 were E&Ps and 57 were OFS operators.

Oil and gas production increased for the fifth quarter in a row, E&P executives said. The oil production index leaped to 33.7 from 19.3 in the third quarter. Likewise, the natural gas production index rose to 26.6 from 17.3.

Utilization of oilfield services (OFS) equipment increased at a slightly slower pace in the final three months than last quarter, with the corresponding index at 29.6, down five points.

“Measures of selling prices and input costs continued to suggest some pressure on margins for oilfield services firms,” the survey said. “The index of prices received for oilfield services remained essentially unchanged at 22.6, while the index of input costs edged up to 30.9.”

Labor market indexes for the fourth quarter continue to point to rising employment and employee hours, with employment growth primarily driven by OFS firms.

“The employment index rose nine points to 33.4 for services firms while retreating to zero for E&P firms,” said the survey. “The employee hours indexes showed a smaller but still sizable gap: 35.8 for services firms versus 20.8 for E&P firms.”

Meanwhile, the aggregate wages and benefits index increased to 25.5 from 18.4, the highest reading since the survey began.

The Dallas Fed’s company outlook index posted a seventh consecutive positive reading and soared more than 20 points to 52.0 in the fourth quarter.

Uncertainty also is disappearing, according to the survey responses.

“The index measuring uncertainty regarding firms’ outlooks declined from 4.9 to -5.3, its first negative reading since the index was introduced in first quarter 2017, which indicates reduced uncertainty,” the survey said. “This reduction was particularly prominent among oilfield services firms, where the outlook uncertainty index fell to -14.3.”

On average, respondents expect West Texas Intermediate (WTI) oil prices to be $58.98/bbl by year-end 2018, with responses of $45-95/bbl. Respondents expect Henry Hub natural gas prices to end 2018 at $3.05/MMBtu). For reference, WTI spot prices averaged $57.42/bbl and Henry Hub spot prices averaged $2.67/MMBtu during the survey collection period.

Respondents were asked where U.S. oil drilling would be in six months compared to mid-December.

Slightly more than half, or 51% of those executives responding, said they expect oil drilling rigs to be higher than current levels. Forty-six percent anticipate U.S. rigs drilling for oil six months from now to be about flat, while 3% expect a lower rig count.

Fifty-one percent of those surveyed also expect capital expenditures to slightly increase in 2018 from 2017. About 19% expect “significant” increases, while 23% see spending near 2017 levels. Only 7% anticipate lower spending year/year.

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