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Oil and Gas Activity Picks Up But Employment Weakness Lingers, Says New Dallas Fed Energy Survey

For Immediate Release: Sept. 28, 2016

Majority of respondents expect to see higher oil prices next year

DALLAS—Oil and gas companies’ business activity increased in the third quarter, according to executives responding to the quarterly Dallas Fed Energy Survey.

The business activity index—the survey’s broadest measure of sentiment among Eleventh District energy firms—strengthened to 26.7 from 13.8 in the second quarter. Positive readings in the survey generally indicate expansion, while readings below zero generally indicate contraction.

“Overall, conditions in the oil and gas sector continued to improve in the third quarter,” said Dallas Fed senior economist Michael D. Plante. “With that being said, signs of the slump still remain visible as employment indicators remained soft, and respondents expressed concerns about continued oversupply in the oil market.”

The survey samples oil and gas companies headquartered in the Eleventh Federal Reserve District—Texas, southern New Mexico and northern Louisiana—many of which have national and global operations.

Labor market indicators contracted in the third quarter, although the majority of firms reported no changes in jobs, hours or wages. The employment index remained negative but rose to –6.5, with 13 percent of firms noting net hiring and 20 percent noting net layoffs.

Exploration and production (E&P) firms reported oil and natural gas production fell again in the third quarter, but at a slower pace than in previous quarters. The oil production index was –10.2, up from –19.7, and the natural gas production index was –20.6, up from –24.7 last quarter.

Oil and gas (O&G) support services firms reported that equipment use increased in the third quarter, driving the equipment utilization index up 25 points to 24.1.

Outlooks six months out improved, with the index coming in at 19.6, similar to 19.0 last quarter. The company outlook index for E&P firms came in at 29.5, compared with 11.2 for support service firms. Respondents continue to be bullish about oil and natural gas prices one-year ahead. Almost 62 percent believe oil prices will be higher than they currently are, and 48 percent believe natural gas prices will increase.

Respondents were also asked a set of special questions about drilling activity for oil and gas in the U.S. next year and beyond.

There was near unanimity that the price of West Texas Intermediate will need to be at or above $50 per barrel to see a substantial increase in drilling for oil, and over 90 percent think it will need to be $55 per barrel or more. Over 70 percent of respondents think U.S. crude oil drilling activity will substantially increase sometime before 2018, with the most frequent response being second quarter 2017.

Around 46 percent of respondents expect U.S. natural gas production to be about the same in 2017 as in 2016, 35 percent expect higher production, and 20 percent expect lower production. Appalachia was seen as the most likely location for natural gas drilling activity to increase in 2017. The average expected Henry Hub natural gas price in 2017 was $3.00 per million British thermal units (MMBtu).

Data were collected Sept. 14–22, and 154 energy firms responded to the survey. Of the respondents, 70 were E&P firms and 84 were O&G support services firms.

Next release: Dec. 29

Media contact:
Alexander Johnson
Federal Reserve Bank of Dallas
Phone: (214) 922-5288
E-mail: alexander.johnson@dal.frb.org