April 2009

U.S. and global recessions have merged with weak energy prices to end Houston’s long expansion. Job growth fell at a 3.2 percent annual rate over the first quarter of this year, while the unemployment rate was up a full percentage point over six months to 6.8 percent. So far, oil-related layoffs have played only a modest role in employment reductions, but continued weakness in natural gas prices may quickly change the pattern for the worse.

Retail and Auto Sales
Local retailers said they think sales have absorbed the economic shock of recent months and hit bottom and may have begun a slow turn up. Help has come from nice spring weather and residual insurance payments from Hurricane Ike, and consumer confidence seems much improved.

Local auto sales, down 47 percent over the last 12 months, continued to mirror a dismal national picture as Houston grew less able to separate itself from the U.S. downturn.

Real Estate
The local market for existing homes remained snagged in tight credit standards and weak economic fundamentals, with sales down 26 percent over 12 months. The median home price was off 8 percent, and the inventory of homes for sale stood at six months. Permits for new home construction were down by over a third.

Houston’s apartment rents continued to rise, but the trend is expected to end because of falling occupancy rates and a large number of new projects still in the pipeline. However, new project proposals are facing delays and cancellations due to financing barriers and the weak economic outlook.

Energy and Refining
Prices for light sweet crude were near $40 per barrel in late February but returned to over $50 per barrel in late March. Much of the improvement seemed to be driven by additional fiscal and monetary stimulus and data indicating greater economic stability. Natural gas prices fell under $4 per thousand cubic feet for the first time since 2002 but moved back over $4 as crude prices rose and economic news improved.

Respondents said fundamentals remained negative, however, with cold weather ending, cool summer weather forecast, industrial demand quite weak, production holding up well and inventories ample.

Refinery capacity utilization remained weak and near 82 percent, but part of the weakness was due to normal spring turnaround and maintenance in the switch from heating oil to gasoline production. Demand for distillates (diesel and heating oil) fell seasonally, and prices slipped along with it. Gasoline prices, however, began to rise seasonally ahead of the summer driving season. Refinery margins improved from very low levels but remain depressed compared with the average in recent years.

Petrochemicals
Petrochemical producers generally indicated that the free fall of late last year was over and they saw growing stability and even small improvements in operating rates. The massive inventory destocking of last fall has given way to sporadic ordering as customers restock on an as-needed basis. Price increases for ethylene and a number of plastic products were driven more by rising feedstock prices than the modest improvements in fundamentals.

Oil Services and Machinery   
Demand for oil services shrinks with the rig count, and the number of working rigs in the U.S. continued to plummet, with no signs of bottoming out. The rig count is down 50 percent from a September peak of 2,031. Texas and New Mexico lost the most, each down more than 50 percent. The share of drilling directed to natural gas remained stable at around 79 percent.

The share of rigs using horizontal drilling has grown, indicating that conventional drilling is falling faster than drilling directed to unconventional gas. Some conventional wells in unconventional shale areas are being drilled and cased, with producers expecting to return after natural gas prices improve. They will then drill horizontally and fracture the formation for a quick boost to production and output.