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March 2006
Energy is clearly beginning to
move the Houston economy again. Oil and gas extraction
jobs were up 5.9 percent in 2005, and manufacturing
jobs rose 3.3 percent. The Houston Purchasing Managers
Index jumped to 67.9 in January, its highest level since
the measure’s inception in 1995. Downtown real
estate remains distressed, but energy companies are
taking space again. Energy-driven corporate relocations
are boosting an already healthy housing market.
Retail Sales
Houston retailers reported
strong January sales, perhaps partly the result of finally
closing out the holiday season with the redemption of
gift cards sold in December. But the strong start to
2006 turned soft in February, as department stores and
discounters struggled to stay on plan. Upscale stores
continue to report very good sales, while furniture
stores complain of continued weakness.
Real Estate
Energy is stirring the pot
for downtown real estate, with at least one major office
building acquisition by an energy company and others
rumored to be in the works. However, energy mergers
and downsizing are also returning space to the market,
so the net change remains uncertain. At present, Houston
still has too much space, and rents in the central business
district are depressed. Citywide, at year-end Houston
saw healthy gains in absorption, largely in Class A
space.
Apartment absorption also picked
up in late 2005, as many hurricane evacuees moved from
hotels. Class B space seemed to be the major beneficiary,
based on absorption and improved rents.
After a record year for both new
and existing home sales, the housing market accelerated
in early 2006, thanks to an improving job market and
corporate relocations. January might have been helped
by warm weather, but that can’t account for the
fact that existing home sales were up 16 percent over
last year. New home sales were up 23 percent.
Energy Prices
Crude oil prices were near
$63 per barrel in early January and have ranged from
$58 to $68 over the past two months. The primary factor
driving prices has been geopolitical situations that
threaten deliveries to a very tight market: militants
in Nigeria, U.N. sanctions against Iran and attacks
on Saudi oil facilities. A much warmer than normal winter
pushed natural gas from $9 per thousand cubic feet to
below $7. Inventories are currently 48 percent above
their five-year average. Unless the weather turns extraordinarily
cold soon, we will go into spring and summer with record-high
inventories.
Refining and Petrochemicals
Weak gasoline and heating
oil prices have pulled refining margins down sharply,
although even negative margins rebounded to five-year
average levels by the end of February. Some refineries
briefly cut back production for economic reasons. Margins
should strengthen, however, as gasoline prices bounce
back over the summer. Operating rates on the Gulf Coast
are declining as the industry begins the spring turnaround
season. Many maintenance turnarounds will be longer
than normal because last fall’s hurricanes resulted
in the postponement of so much work.
Prices of petrochemicals (such
as ethylene, polyethylene, polypropylene, PVC and chlorine)
have given ground this year but remain well above prehurricane
levels. Downward price pressure has resulted from precautionary
stocking of imports following the hurricanes, seasonal
weakness and domestic production’s return to normal
levels. Product margins have been under pressure from
price declines, but this has been offset by the declining
price of natural gas feedstock.
Oil Services
The domestic drilling market
remains extremely strong, with the rig count adding
about 75 rigs since early January. The increase is partly
the addition of some foreign rigs and some hurricane-damaged
rigs returning to service, but it’s primarily
new rigs going to work. Another 250 rigs are under construction,
with some delivery delays caused by shortages of components.
The key driver of activity is the same: land-based drilling
directed toward natural gas.
—Bill Gilmer
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