Dallas Fed Energy Survey

Fourth Quarter | December 28, 2017

Price Forecasts

West Texas Intermediate Crude

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Henry Hub Natural Gas

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NOTE: Price during survey is an average of daily spot prices during the survey collection period.

SOURCES: Energy Information Administration; Wall Street Journal.

Fourth Quarter | December 28, 2017

Special Questions

Data were collected Dec. 13–21, and 132 oil and gas firms responded to the special questions survey.

Do you expect the number of U.S. rigs drilling for oil six months from now to be higher, lower or near current levels?

A little more than half of the executives—51 percent—said that they expect the number of U.S. rigs drilling for oil six months from now to be higher than current levels. Forty-six percent noted they anticipate the number of U.S. rigs drilling for oil six months from now to be near current levels. Only three percent of executives said they expect the oil-directed rig count to be lower six months from now.

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At what West Texas Intermediate (WTI) crude oil price would you expect the U.S. oil rig count to substantially increase?

Forty-two percent of executives expect the U.S. oil rig count to substantially increase if WTI crude oil prices are between $61 per barrel and $65 per barrel. Thirty-one percent of executives expect prices will need to be between $66 per barrel and $70 per barrel to see a substantial increase, while 20 percent of executives believe prices will need to be above $70 per barrel for oil rig counts to substantially increase. Only seven percent of executives believe that prices below $60 are sufficient to generate a substantial increase in the U.S. oil rig count. For reference, WTI spot prices averaged $57.42 per barrel during the survey collection period.

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What are your expectations for your firm’s capital spending in 2018 versus 2017?

Just over half of the executives—51 percent—said that they expect their firm’s capital spending will slightly increase in 2018 compared with 2017. Nineteen percent expect significant increases, while 23 percent expect spending to be near 2017 levels for 2018. Only seven percent expect to lower spending in 2018 compared with 2017.

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What do you expect the West Texas Intermediate crude oil price to be in the longer term (three to five years from now)?

For this special question, executives were asked to provide a specific price for WTI crude oil expected in the longer term (three to five years from now). Expectations centered around $60–$69 per barrel, with the average response across all executives being $66.16 per barrel and a median of $65 per barrel. The most frequent response was $60 per barrel, followed by $65 and $70. Only 11 percent of responses were under $60.

Compared with price expectations for year-end 2018, the longer term had a higher average ($66.16 versus $58.98), and there was more variation in the responses (standard deviation of $9.14 versus $5.76). For reference, WTI spot prices averaged $57.42 per barrel during the survey collection period.

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Special Questions Comments

Exploration and Production Firms

• The oil industry in the lower 48 states appears to be in the “Goldilocks stage”—not too strong, not too soft, just right—which incents everyone to be efficient.
• We believe that the worldwide natural field decline of 5 to 6 percent per year will not be offset by new discoveries or U.S. shale production in the three- to five-year time frame. This belief is driving our expectation of higher oil prices in the early 2020s.
• We are in acquisition mode and, if successful in buying some properties, will be adding staff and increasing spending to enhance production on those properties.
• The ethereal nature of demand is the most important issue we’re currently facing. If perceived demand continues to increase, then prices could move higher. Worldwide economic improvement creates a reason for optimism in higher crude prices. Natural gas, on the other hand, is stuck in a rut for a very long time.
• Electric transportation vehicles and electric rail will drastically decrease the demand for crude oil in the longer term (20 years).

Oil and Gas Support Services Firms

• I expect the average WTI crude oil price to remain in the $50- to $60-per-barrel range over the next five years but with higher volatility due to the diminished ability of Saudi Arabia to act as swing producer. I believe we may experience $100 and $30 per barrel again over that time frame.
• Finding the new “norm,” be it $55 or $65 per barrel, is necessary for our customers to sustain both drilling rigs and necessary maintenance to production facilities.

Fourth Quarter | December 28, 2017

Historical data are available from first quarter 2016 to the most current release quarter.

Business Indicators: Quarter/Quarter

Business Indicators: Year/Year

Fourth Quarter | December 28, 2017

Activity Chart

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Fourth Quarter | December 28, 2017

Comments from Survey Respondents

These comments are from respondents’ completed surveys and have been edited for publication. Comments from the Special Questions survey can be found below the special questions.

Exploration and Production Firms

• We still believe that $60 per barrel is the tipping point for substantial increases in domestic drilling activity. If backwardation continues and spot prices exceed $60 per barrel, then, in our opinion, prices will drop substantially and return to "lower for longer.”
• The worst appears to be over—at least for the time being.
• We are planning a significant increase in drilling in 2018 compared to 2017.
• Factor costs are rising at the same pace as crude oil prices, and we now expect both oil prices and service costs to remain relatively flat. Wage pressure on skilled laborers will put more upward pressure on costs to service companies and thus on the prices vendors charge operators to frack, drill, cement and produce wells.
• Our outlook for commodity prices is more positive than last quarter, but we are seeing rising costs and, in particular, lengthening lead times from suppliers. It looks like inability to get equipment to drill sites in a timely manner is going to be a bit of a problem for us in 2018.
• As crude prices inch up, I grow more optimistic for the upcoming year.
• Regulatory responses to Oklahoma earthquakes continue to hammer earnings due to lawsuits, mandatory saltwater disposal, well pluggings, curtailments and reduced upstream production. These factors have forced the sale of producing properties at distressed prices. Oil and gas pricing problems are being felt now in the Permian Basin, where there is too much gas for too little infrastructure. The world market is seeing that a barrel of oil is not like every other barrel of oil; quality and American Petroleum Institute (API) gravity issues are finally sinking in with buyers.
• As with last year, many regional and political issues have the potential to significantly escalate market pricing of oil and gas. Those issues can affect market pricing without reference to the conventional measurements of supply and demand or “balancing” of supply and demand. Assuming that one or more of those issues is not further escalated, it seems appropriate to expect moderate increases in both oil and gas prices during 2018, at a rate slightly above the basic inflation rate.
• Commodity price stability in a decent price range is facilitating our ability to finance capital programs and hedge prudently, which in turn has made it easier to support longer-term capital programs and hiring for growth.
• The administration is making a big difference with its pro-business rather than pro-regulation attitude. It is also selling America to the global community like no previous administration. The administration is also creating a tax code that is supportive of work and against government. Our system has changed from government for the people to people for the government.
• I sense that a floor for West Texas Intermediate (WTI) crude oil prices is developing around $60 per barrel.
• Small independent operators will have difficulty securing certain services from major service providers due to service providers’ focus on large-scale unconventional programs. The limited number of experienced service providers will cause difficulty in getting vertical work accomplished efficiently.
• We have a couple of new projects that are creating the increased activity. However, we see new activity throughout the Permian Basin.
• We see the WTI crude oil price fluctuating between $45 and $60 per barrel in 2018.
• The current price of natural gas does not justify exploration and production. A higher oil price is needed to justify conventional exploration.
• We expect to significantly increase our operations in 2018.

Oil and Gas Support Services Firms

• The real economics of a lot of the Wolfcamp/Wolfberry Midland Basin are beginning to show through. Investors are now asking, “Where is the beef?” Returns are not coming in as forecasted, and reserves will prove to have been overestimated. Declines will make it virtually impossible to establish significant free cash flows because maintaining a consistent level of production requires new drilling to make up for declines. The resources are there to be exploited, but I feel that if some type of pressure maintenance or pressure enhancement projects are not implemented soon, millions of barrels of oil will be left in the ground and a lot of people will lose a lot of money.
• We expect activity to increase well into 2018, albeit at a modest pace compared to the rate of change in the first half of 2017 over 2016.
• Our prospects for 2018 appear to be improving.
• Hiring qualified personnel, especially commercially licensed oilfield drivers, has become increasingly difficult and more expensive. Rates for our services are still depressed in most areas of our service, but in the coming months we are looking to negotiate higher rates in all plays where we are currently active: the Eagle Ford Shale, Barnett Shale and Permian Basin.
• Business continues to strengthen, and prices have improved quarter over quarter.
• Sentiment has improved over the second half of 2017, and the outlook for fiscal year 2018 is better than it was a quarter ago.
• We are flat quarter over quarter in all respects except costs.
• Not that it was ever easy, but predicting the price of oil in 2018 is much harder for a number of reasons. Storage numbers have dropped worldwide, but I have not seen that reported for the U.S. Economies worldwide are improving, which should increase demand for oil. Pressure on producers by “investors” (mostly stockholders) in the oil business for returns on their “investments” may have a downward effect on supply as producers spend less money on new wells. Acreage prices continue to be outlandish, and there is no way all these expensive leases can be drilled before their primary terms expire. High acreage prices lower the return on investment for a new well, which may put more pressure on producers to curtail drilling. In short, there are so many variables that I have no idea what oil will do in 2018.
• It is certainly looking better as West Texas operations are at full tilt. East Texas is starting to wake up.