DALLAS (NEWS RELEASE) — The following is a news release from the Federal Reserve Bank of Dallas:
Energy sector activity declined modestly in third quarter 2020, according to executives responding to the Dallas Fed Energy Survey.
The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—remained negative but improved from -66.1 in the second quarter to -6.6 in the third quarter.
Production indexes rose significantly but remained negative. The oil production index rose from -62.6 in the second quarter to -15.4 in the third, according to exploration and production (E&P) executives. The natural gas production index increased 38 points to -10.1.
“The oil and gas sector continues to be negatively impacted by low prices, although the situation has improved relative to the previous quarter,” said Michael Plante, Dallas Fed senior research economist. “Most indicators, including business activity, employment and capital spending, contracted again; however, the rate of decline was much slower than what was seen in the last survey.”
In a series of special questions, firms were asked about OPEC’s role in determining oil prices going forward, whether U.S. crude oil production has peaked, upstream firms’ primary goals for the coming six months, and what price is needed to see a substantial increase in the oil rig count and the completion of drilled but uncompleted wells.
“Survey responses suggest an increase in drilling activity is unlikely in the near future,” Plante said. “Most participants believe oil prices need to be much higher than current levels before there is a major increase in the U.S. oil rig count.”
Other survey highlights include:
Firms cut capital spending. The index for capital expenditures for E&P firms increased from -66.1 in the second quarter to -16.4 in the third, indicating a less-severe reduction in capital spending. Additionally, the index for capital expenditures for oilfield services firms increased from -73.5 to -35.1.
Oilfield services firms saw conditions continue to deteriorate, though at a slower rate. The equipment utilization index jumped 50 points to -18.9 in the third quarter, implying utilization declined but at a much slower pace than over the prior quarter. The operating margins index increased from -68.6 to ‑30.8. The index of prices received for services also remained in negative territory but moved up to ‑26.4. Firms found some relief as input costs continued to decline; the index was -9.5 this quarter.
Employment contracted at a more modest pace. The aggregate employment index posted a sixth consecutive negative reading but moved up from -46.1 to -18.1. Additionally, the index of aggregate employee hours worked increased from -47.0 to -15.3. The index for aggregate wages and benefits remained in negative territory but rose from -41.7 to -19.4.
Company outlooks returned to barely positive territory. Coming in at 1.9, the index reading indicates the outlook remained relatively unchanged—a stabilization from the sharp deterioration seen over the prior two quarters. Additionally, fewer firms noted rising uncertainty this quarter than last, and the aggregate uncertainty index fell 19 points to 17.2.
Firms see higher oil prices ahead. On average, respondents expect a West Texas Intermediate (WTI) oil price of $43.27 per barrel by year-end 2020, with responses ranging from $30 to $60 per barrel. For reference, WTI spot prices averaged $38.47 per barrel during the survey collection period.
Most executives anticipate a bigger role for OPEC and think U.S. oil production has peaked. Among executives responding to the special questions survey, 74 percent said they believe OPEC will play a bigger role in the determination of the price of oil going forward. Most executives—66 percent—said they believe U.S. oil production has peaked.
The survey samples oil and gas companies headquartered in the Eleventh Federal Reserve District—Texas, southern New Mexico and northern Louisiana. Many have national and global operations.
Data were collected Sept. 9–17, and 166 energy firms responded. Of the respondents, 112 were exploration and production firms and 54 were oilfield services firms.
Next release: Dec. 30, 2020
(News release from the Federal Reserve Bank of Dallas)