Oil and gas companies operating in the Federal Reserve’s 10th District -- Kansas, Colorado, Nebraska, Oklahoma, Wyoming and the northern half of New Mexico -- expect drilling and business activity in the district to drop to 2016 levels, according to a quarterly report released on July 12 by the Federal Reserve Bank of Kansas City.

The bank’s report is a quarterly survey of major oil and gas companies in the 10th district on various aspects of business confidence, the results of which are synthesized into indexes.

The survey, conducted June 17-June 28, revealed changes in drilling, capital spending and employment. All results are diffusion indexes, i.e. the percentage of firms indicating increases minus the percentage of firms indicating decreases.

Companies expect drilling and business activity in the district to drop to minus 26 in six months’ time, the lowest since the first quarter of 2016.

“Natural gas is extraordinarily weak. We are likely to net less than $1/mmBtu after transportation/marketing. While gas prices should rebound, any length to this recent downturn will have serious impacts on future activity,” said one energy company cited in the report.

The index for quarterly changes in drilling and business activity in the second quarter of this year was 7, up from 0 in the first quarter. The year-over-year change in drilling and business activity index fell, however, to minus 11 from 17 in the second quarter of 2018.

“Firms in our region expect oil prices to remain profitable in coming years, but just marginally so,” said FRB economist Chad Wilkerson. “Meanwhile, low natural gas prices are expected to persist. As such, future drilling plans have eased somewhat.”

For a substantial increase in Midcontinent drilling activity to occur, West Texas Intermediate (WTI) prices would need to reach $66/bbl on average, according to company participants in the survey. Natural gas prices would need to average $3.40/MMBtu to spur significant drilling increases. Those figures both mark a substantial increase from current prices.

The settlement price for gas delivered in August at the Henry Hub was $2.453/MMBtu on July 12th, nearly $1.00/MMBtu less than the necessary price to spur mid-continent drilling increases.

WTI crude futures were trading around $60/bl on the New York Mercantile Exchange as of mid-morning on July 15.

Companies surveyed in the report expect WTI to average $57/bbl in six months’ time, $60/bl in a year and $63/bbl in two years. Expected crude prices all declined from the previous quarter.

Expected natural gas prices have declined with Henry Hub prices expected to average $2.52MMBtu at the end of the year, $2.59/MMBtu in a year and $2.79/MMBtu in two years. The expected long-term increases stem largely from expectations related to exports.

Expectations for capital expenditures in six months declined in line with drilling expectations, falling to minus 4. The spending index in the second quarter rose slightly to 4 from a year ago.

Upstream companies have championed a strategy of spending discipline this year in response to takeaway capacity challenges and downward price pressure.