September 2007

With the national economy under intense scrutiny for ripple effects from subprime mortgages and foreclosures, the oil industry has kept its eye firmly fixed on rapidly expanding global markets. Oil prices in excess of $70 per barrel have offered the Houston economy extra insurance in uncertain times. Job growth over the past three months has strengthened to a 3.7 percent pace, and the local unemployment rate has remained below 4.5 percent all year.

Retail Sales
Retailers expected great seasonal activity with back-to-school sales and summer ending, but most Houston retailers found that August exceeded their optimistic expectations. Almost all segments—department stores, discounters, furniture stores and independents—said sales shook off the negative effects of heavy rain in July and ran well ahead of plan through August.

Housing and Construction
Houston’s existing-home market is holding up better than many other markets across the U.S., its health underpinned by fewer past excesses than others and solid continued job growth. July sales were up 1 percent over July of last year, although inventories were up 12 percent. The weakest part of the market is homes priced under $150,000, suggesting that tighter lending standards primarily are slowing entry-level purchases. Postings and foreclosures are significantly higher for Harris County, and the rate at which postings are being foreclosed is also rising.

The value of new residential permits issued by the city of Houston is up 8 percent year to date but down 14 percent in July when compared with a year earlier. Permit values are up 58 percent in July overall, however, led by a 150 percent increase in new nonresidential construction.

Energy Prices and Refining
West Texas Intermediate passed $70 per barrel in early July, steadily climbed to record levels near $78 in late July, then fell back to near $70 by early September. The price climb was attributed not only to stronger demand from U.S. refineries as capacity came back online from planned and unplanned outages but to a falling dollar and continuing concern over tensions in Nigeria and Iran.

Wholesale gasoline prices peaked near $2.30 per gallon before falling steadily to levels near $2 or below in August. Refinery utilization rates moved to over 90 percent, increasing demand for crude oil and bringing inventories of both gasoline and distillates closer to normal levels. Refinery margins were under strong downward pressure, with crude prices rising and gasoline prices falling.

Natural gas inventories moved to all-time high levels for August. Prices remained near $6 per thousand cubic feet, rising above this level only with high air-conditioning loads caused by a heat wave, or news of hurricane activity that might affect the Gulf of Mexico.

Chemicals
The story remains unchanged, with a weak dollar and a strong global economy driving demand for ethylene, polyethylene, polypropylene, polyvinyl chloride and many other plastics. Domestic demand fell last year, but export markets opened and replaced much of the lost domestic sales. Although most plastics are still selling below year-ago levels, they have been climbing steadily for most of 2007.

Oil Services and Machinery
The domestic rig count rose by 20 in recent weeks to the highest level since January 1986. The increase was led by land-based drilling as drillers shook off concerns about high natural gas inventories. International drilling is growing and remains an important source of strength for U.S. service companies. Demand is still strong for services delivered at the wellhead and for machinery and supplies consumed by the drilling process. For durable equipment, demand has slowed sharply as drilling has flattened out in recent months.