February 2007

Many of us remember—probably with some embarrassment—the “Let a Yankee Freeze in the Dark” bumper stickers of the 1980s. This February, Houston’s oil producers and service companies may have achieved a soft landing by heating and lighting the homes and businesses of the Midwest and Northeast, struck by a brutal cold wave. Record natural gas inventories had forced a pause in domestic drilling, but cold weather pulled inventories down sharply, and they are now below their level at this time last year. The industry has refocused on longer-term issues like the high depletion rate of natural gas and its low replacement rate. The futures strip for natural gas moved up as a result.

Retail Sales and Autos
Houston retailers reported a solid January, followed by a somewhat weaker February, that—on net—left them feeling that the year had started well. Large department stores were on plan and furniture stores strong, but home centers were weak. Hiring quality workers has become a growing problem for retailers in recent months.

With auto sales slumping nationally, Houston is out of step. Car and truck sales for the metro area were up 20 percent in January compared with 12 months earlier.

Real Estate
The Houston housing market has cooled in recent months from the torrid pace of early 2006, but existing home sales were still solid in January, at 8.1 percent above the year earlier. New home sales have flattened out, as some national builders struggle with balance sheet problems in markets outside Houston. Single-family permits peaked earlier than usual last year—in May—and are down 10.9 percent from January 2006.

The local apartment market has also softened, with occupancy falling throughout 2006 and into 2007. The absolute number of occupied units dropped as Katrina evacuees left apartments, even as thousands of new units were being completed. Rents are flat, and the biggest declines in occupancy rates are for class B and C properties.

Energy Prices
Light sweet crude finished 2006 near $60 per barrel, then fell by over $10 per barrel in the next 15 days. Warm weather, slack demand and doubts about OPEC’s ability to meet announced production cuts all contributed to the slide. Price has since bounced back to near $60, the result of extremely cold weather in the United States and international tensions in Nigeria and Iran.

Gasoline prices largely followed the price of crude oil down and up, while heating oil prices responded faster and rose further with the arrival of cold weather. Gasoline inventories climbed as refiners turned to gasoline production early because of warm January weather, but stocks remain well below their levels at this time last year. Heating oil and diesel inventories remained higher than last year, even with cold weather.

Frigid temperatures produced heavy draws on natural gas inventories, pulling inventories below year-earlier levels. Although inventories remain statistically high—at more than 10 percent above the five-year average—they have returned to familiar territory from unprecedented lofty levels. Natural gas spot prices at the Henry Hub in Louisiana weakened to $5.50 per thousand cubic feet early in the year, but have hovered between $8 and $9 for most of February.

Refining and Petrochemicals
Gulf Coast refiners went into an extensive and extended maintenance season in January, with over a million barrels of capacity out of service on the Texas and Louisiana Gulf Coast at midmonth. Refinery margins have remained steady for the past several months at $10–$11 per barrel.

Demand for petrochemicals and vinyl plastics has been lackluster, largely due to the falloff in housing construction. Some of the domestic slowdown has been offset by robust exports, which picked up late last year and remain very strong. Many plastics prices fell sharply—by 10 to 20 percent—due to soft demand. Polypropylene and polyethylene prices stabilized and rose by a few cents in February, but PVC (40 percent of which goes to pipe for construction) continued to fall.

Oil Services and Machinery
The number of working rigs in the U.S. has averaged about 1,725 in recent weeks and has basically been flat since last August. International drilling, in contrast, rose to new highs in January, with improvement in all parts of the world except the Asia–Pacific region. The flat domestic rig count was blamed on softer prices for natural gas and fear of high inventories, but most respondents pointed out that rising costs have also played a role. Worker wages rose far more than expected, oil service costs have shot up and there were unexpected costs associated with the 2005 hurricanes.