Threat of recession and drop in oil demand and prices worry Permian producers
Energize Weekly, October 5, 2022
Even as oil production rebounds in the Permian Basin, industry executives are worried about a drop in demand due to a recession and remain dogged by rising costs and supply chain problems, according to a Federal Reserve Bank of Dallas survey.
The company outlook index – a general measure of industry prospects – was cut almost in half to 33 points, while the uncertainty index rose threefold to 35.7.
The third-quarter survey of executives from 163 energy companies in New Mexico, Texas and Louisiana was conducted between Sept. 14 and 22.
“Our outlook remains positive, but is becoming more uncertain given continued monetary and fiscal tightening coupled with persistent inflationary pressure,” one executive told the survey. The respondents were not identified.
Still, oil output in the Permian Basin, the country’s largest shale basin, straddling Texas and New Mexico, rose to a record 5.445 million barrels a day in August, according to the U.S. Energy Information Administration.
The increased production came even as operating costs increased for the seventh consecutive quarter and labor costs (wages and benefits) “remained elevated.”
Rising oil prices have bolstered activity in the basin, with the spot price of West Texas Intermediate (WTI) crude oil increasing from $52 a barrel in January of 2021 to almost $115 a barrel in June 2022.
Industry executives expressed concerns that the combination of inflation and recession will stifle demand, and they expect the WTI price to drop to $89 a barrel by the end of the year – down from the second-quarter survey estimated price of $106 a barrel.
On Sept. 29, the spot price for WTI oil was about $80 a barrel.
“It is safe to assume that there will be volatility in all energy markets,” one executive said.
This has made it difficult for exploration and production (E&P) companies to get investment capital for new projects and new production. “No one is interested in giving capital to E&P firms. It’s wonderful news for long-term prices,” one executive told the survey.
Eight-five percent of the executives surveyed said they expect a tightening of the oil market by 2024 as a result of the current lack of investment in exploration.
As more liquefied natural gas (LNG) is shipped to international markets, the era of inexpensive, domestic gas will also be over by the end of 2025, according to 69 percent of the respondents. Another 12 percent place the end of the cheap gas age after 2030.
“Shale will likely tip over in five years, and U.S. production will be down 20 to 30 percent quickly,” one executive said. “When it does – this feels like watching the steam roller scene in Austin Powers. Oil prices in the late 2020s will be something to behold.”