Dallas Fed: Activity, Optimism Rising Among Oil & Gas Producers

September 25, 2020
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Oil and gas companies say operations are slowly ramping back up after reaching a bottom in 2Q2020, but rig counts will not significantly increase until West Texas Crude is more than $45 per barrel, according to the Dallas Fed Energy Survey.

The Business Activity Index – the Fed survey’s broadest measure of condition facing Eleventh District energy firms- was up from the last survey, climbing from -62.6 in 2Q2020 to -9.9 in 3Q2020. Business activity in the oil and gas sector saw a modest decline in the third quarter of 2020 as the index remained in negative territory; however, the sector saw material improvements.

An executive commenting on the outlook of business activity said, “COVID-19 reduced oil demand and created uncertainty in oil consumption forecasts. Political uncertainty is a huge driver of oil market uncertainty. Capital expenditure investments are scheduled to decline until market indicators show recovery from COVID-19 and [and end of] overproduction. Storage capabilities are being challenged due to less demand.”

One bright spot captured by the survey was the Company Outlook index. The index responses were in positive territory for the first time this year. The index has steadily risen as the industry has gained a better understanding of the pandemic’s implications for energy markets. This year the index has moved from -74 in 1Q2020 to -45.8 in 2Q2020 and is now at -9.6 for 3Q2020.

The survey also contains questions on companies’ outlooks for both oil and gas production. In this survey, both indexes were at their highest level of 2020, with the gas production index at -10.1 and the oil production index at -15.4. These numbers represent a material improvement from 2Q2020’s -47.8 index for natural gas production and -45.8 for oil production.

Despite the improvement in the oil and gas production indexes, the survey also included a special question regarding the peak of U.S. production. Most executives – 66 percent – said they believe U.S. oil production has peaked, and 74 percent said they believe OPEC will play a larger role in determining oil prices in the future. This is entirely plausible with prices at their current levels. As demand recovers, low-cost OPEC producers could increase production to meet the incremental demand at price levels that U.S. shale producers simply cannot.

The change in expectations around gas prices changed significantly as prices have rallied 44c since the survey was last published, from $1.61/MMBtu to $2.05/MMBtu. The average Henry Hub price response was $2.55/MMBtu, up from the prior quarters average of $2.15/MMBtu.

The survey includes questions about companies’ future expectations of price. Since the 2Q2020 survey was released, the price of WTI has increased by 72c. The average survey response for WTI was $43.27, an improvement from last quarters’ average of $42.11. The distribution of responses is shown in the chart on the left.

The Dallas Fed Energy Survey goes out to about 200 oil and gas firms located or headquartered in the Eleventh District—Texas, southern New Mexico, and northern Louisiana—which operate regionally, nationally, or internationally.

We continue to monitor oil, gas, NGLs, regional markets, jet fuel, and interest rates for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact info@aegis-energy.com. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at view@aegis-energy.com.

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