Oil and gas companies operating in the Federal Reserve’s 10th District -- Kansas, Colorado, Nebraska, Oklahoma, Wyoming and the northern half of New Mexico – indicated a “significant drop” in drilling and business activity in the third quarter, according to a quarterly report released Friday 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 Sept. 16-Sept. 30, revealed changes in drilling, capital spending and employment.

The drilling and business activity index fell from 7 to minus 23 sequentially, in line with expectations from the second-quarter survey.

“There is still an oil glut and global demand growth is tepid. We may begin to see results from the current capital restrictions sometime in late 2020. Middle East is strictly a wildcard at this point,” said one energy company cited in the report.

The year-over-year change in drilling and business activity index also fell, declining to minus 21 from minus 11 in the third quarter of 2018.

“Firms indicated the level of energy prices was the main constraint on their activity and plans,” said Chad Wilkerson, Oklahoma City Branch executive and economist at the Federal Reserve Bank of Kansas City. “The average profitable price for oil rose slightly in 3Q and was similar to recent and expected oil prices, while natural gas prices remained below profitable levels.”

For drilling to be profitable on average across the fields in which the survey respondents are active, the average oil price would need to be around $55/bbl, on par with the average price quoted in 3Q2018.

The average natural gas price needed for profitability was $2.91/MMbtu, a significant decline from the $3.23/MMbtu reported a year ago.

Companies surveyed in the report expect West Texas Intermediate to average $58/bbl in six months’ time, $60/bbl in a year and $63/bbl in two years, largely on par with 2Q2019 expectations.

Expected natural gas prices increased slightly for the short-term, with Henry Hub prices expected to average $2.59/MMBtu at the end of six months, $2.58/MMBtu in a year and $2.81/MMBtu in two years.

Expectations for capital expenditures in six months declined to minus 17 in the third quarter, down from minus 4 in the previous quarter.

One of the bank’s special questions for the quarter touched on the impact of global trade tensions.

Roughly 70% of firms reported slight-to-significant negative effects from trade tensions on their business in the past year. A similar share of firms anticipated negative effects from trade policy on their business in 2020.