Kunal Patel is a senior business economist at the Federal Reserve Bank of Dallas joins Jason Spiess for an update on the oil and gas activity in the 11th District, including the Permian Basin in Texas.
Activity in the oil and gas sector expanded at a strong pace in the third quarter, according to oil and gas 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 elevated at 46.0 but below the 57.7 record-breaking reading last quarter. This suggests the pace of the expansion decelerated slightly but remains solid.
Oil and natural gas production increased at a similar pace compared with the prior quarter, according to executives at exploration and production (E&P) firms. The oil production index held fairly steady at 31.7 in the third quarter. The natural gas production index was essentially unchanged at 35.6.
Costs increased for a seventh straight quarter, with the indexes near historical highs. Among oilfield services firms, the index for input costs remained elevated but slipped from its series high to 83.9. None of the 58 responding oilfield services firms reported lower input costs. Among E&P firms, the index for finding and development costs was 64.7, down slightly from its high last quarter of 70.6. Additionally, the index for lease operating expenses was 70.2, easing slightly from the high last quarter of 74.1.
It is taking longer for firms to receive materials and equipment. The supplier delivery time index remained elevated at 28.4 in the third quarter, down slightly from a series high of 31.9 in the second quarter. Among oilfield service firms, the measure of lag time in delivery of services declined from 36.0 to 21.1 but remained well above average.
Oilfield services firms reported broad-based improvement, with key indicators remaining in solidly positive territory. The equipment utilization index remained elevated but fell from 66.7 in the second quarter to 55.2 in the third. The operating margin index remained positive but declined from 32.7 to 25.4. The index of prices received for services inched higher, from 62.7 to 64.9—a record high.
All labor market indexes in the third quarter remained elevated, pointing to strong growth in employment, hours and wages. The aggregate employment index posted a seventh consecutive positive reading, increasing from 22.6 in the second quarter to a record 30.0. The aggregate employee hours index was 33.3, close to its historical high. The aggregate wages and benefits index remained elevated and was largely unchanged at 47.3.
Optimism waned somewhat this quarter as the company outlook index posted a ninth consecutive positive reading but fell 33 points to 33.1. The overall outlook uncertainty index jumped from 12.4 to 35.7, suggesting uncertainty became much more pronounced this quarter, especially among E&P firms. The uncertainty index was 17.8 for services firms versus 45.2 for E&P firms, with 53 percent of E&P firms reporting an increase in uncertainty.
On average, respondents expect a West Texas Intermediate (WTI) oil price of $89 per barrel by year-end 2022; responses ranged from $65 to $122 per barrel. Survey participants expect Henry Hub natural gas prices of $7.97 per million British thermal units (MMBtu) at year-end. For reference, WTI spot prices averaged $85.49 per barrel during the survey collection period, and Henry Hub spot prices averaged $8.16 per MMBtu.
To read the entire report, click here
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