Oil demand and prices are unlikely to return to pre-Covid levels until 2022 or 2023, according to the latest quarterly energy survey conducted by the Federal Reserve Bank of Kansas City.

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The Kansas City Fed, as it is known, every quarter surveys current and expected energy activity across the Midcontinent, as well as expectations for oil and natural gas prices among firms in the Tenth Federal Reserve District.

The district covers the northern half of New Mexico, the western third of Missouri, and all of Colorado, Kansas, Nebraska, Oklahoma and Wyoming.

“Over a quarter of firms surveyed expected global oil demand to return to pre-Covid levels by 2Q2021, but the majority of contacts don’t expect oil demand to fully rebound until 2022 or 2023,” said Kansas City Fed economist Chad Wilkerson.

Respondents were asked what they expect the West Texas Intermediate (WTI) oil price to be in six months, one year, two years and five years. The average predictions were $43, $47, $53 and $60/bbl, respectively, in line with the expected duration of depressed oil demand.  

“Expected oil prices for the near term were higher than price expectations from 2Q2020, but longer-term projections were steady,” researchers said.

Predictions for Henry Hub natural gas prices, meanwhile, rose moderately from the previous quarter, with firms forecasting an average price of $2.62, $2.71, $2.84 and $3.28/MMBtu for the same intervals.

Drilling and business activity in the district rose slightly in the third quarter from historic lows earlier this year, said Wilkerson, “but revenues, employment, and capital expenditures continued to decline.”

The U.S. rig count also rose last week for a fourth straight time according to Baker Hughes Co.

The survey showed that district activity stabilized somewhat during 3Q2020, and that future activity “was expected to remain largely unchanged.” 

For drilling to be profitable, firms indicated on average that a $49/bbl oil price was needed. WTI prices have hovered around $40 for the last few months.

“Without a doubt this is the most difficult cycle I’ve experienced in my 30-year career,” one respondent to the survey said. Another said the longer it takes for the economy to recover and for people to get out and start spending, “the more difficult it will be for companies to survive.”

Another executive surveyed predicted that demand would remain low for the next year and return to normal in 2022, adding that, “constrained drilling should drive prices higher. Capital is scarce in the shale plays as the return is marginal and the capital need is so high to maintain production levels.”

Respondents noted an improved outlook for liquefied natural gas (LNG) demand. Said one, “We need more rigs drilling for natural gas. Associated gas won’t grow and if anything will shrink.”

Another participant said while there is a “severe lack of capital being deployed” in the energy sector, bullish macroeconomic factors include “significant decline rates, reduced supplies from Canada,” and an “improved LNG market.”

Asked about their primary goals over the next six months, 24% of firms said maintaining production is their highest priority, while 21% cited reducing debt and 14% said acquiring assets.

More than half (55%) of firms surveyed said they expected a large increase through 2021 in energy-related mergers and acquisitions (M&A), as well as defaults and bankruptcies.

Not all respondents agreed that more M&A is likely. One participant noted that M&A is difficult because of the “number of companies with high leverage on the buyers’ side.”Another warned that companies face a “large debt load and expiring hedge positions over the next 12 months.”