As oil and natural gas prices surged, drilling and energy business activity across the Federal Reserve Bank of Kansas City’s footprint hastened in the third quarter, results of a new survey show.
The Kansas City Fed, as it is commonly known, said its quarterly Tenth District Energy Survey found that oil and gas firms collectively reported greater activity in 3Q2021 when compared with both the prior quarter and the year-earlier quarter.
A majority of firms reported higher revenues and profits. Drilling and business activity expectations for coming quarters also increased, with participating executives noting strong demand and lofty oil and gas prices. The Kansas City Fed’s district includes the western third of Missouri; all of Kansas, Colorado, Nebraska, Oklahoma and Wyoming; and the northern half of New Mexico.
Prices are surging amid tight global supplies and strong demand as countries across the globe emerge from the worst of the pandemic and energy needs escalate, said Chad Wilkerson, a Kansas City Fed economist.
Henry hub natural gas futures have more than doubled in 2021, recently trading near the $6.00/MMBtu level. U.S. benchmark crude prices, meanwhile, have climbed more than 60% this year. West Texas Intermediate (WTI) prices topped $81/bbl in intraday trading Monday, the highest level since 2014.
Overall, firms reported oil prices “needed to be on average $57/bbl for drilling to be profitable, and natural gas prices needed to be $3.88,” Wilkerson said.
The Kansas City Fed’s drilling and business activity index rose from 33 in the second quarter to 39 in the third quarter. It hovered at a meager reading of 4 a year earlier amid demand destruction imposed by the pandemic. The latest survey was conducted over the last half of September.
The indexes for revenues, capital expenditures, supplier delivery time, employees, employee hours, wages and benefits, and access to credit rose at a faster pace in 3Q2021 compared to a year earlier, Wilkerson said.
Expectations indexes continued to expand in the third quarter. The future drilling and business activity index, at 46, was up from 41 in 2Q2021, “indicating additional firms expected energy activity to expand. Future revenues and profits indexes remained very high, and expectations for wages and benefits increased.”
[Tune in: Superseding domestic weather, storage and production — it’s global supply worries that are driving the meteoric rise of U.S. natural gas prices. Join NGI’s Price & Markets Editor Leticia Gonzales and Associate Editor Kevin Dobbs as they dive into the global fundamentals driving natural gas prices in the U.S. in this timely episode of the Hub & Flow podcast.]
Price expectations for oil and natural gas were positive. Firms were asked what they expected oil and natural gas prices to be in six months, one year, two years, and five years. The average expected WTI prices were $73, $74, $75, and $76, respectively. The average expected Henry Hub prices were $4.72, $4.22, $4.31, and $4.79.
Participants were also asked their expectations for U.S. oil production, with 60% of firms not expecting output to return to pre-pandemic levels, while 40% responded affirmatively that production would rebound to levels generated in 2019, prior to coronavirus outbreaks.
Of those who expect a full output recovery, only 7% anticipated it by the end of 2021, while 47% expected a return to pre-pandemic levels in 2022 and 13% expected it in 2023. The rest projected the full rebound after 2023.
Those who anticipate the full recovery in later years – or not at all – noted that, while activity is increasing overall, major U.S. producers have been slow to ramp up output, preferring instead to return more capital to shareholders or to invest more in renewable energy projects.
Though not asked about natural gas output specifically, respondents to the survey who expect rising oil production said it would result in increased supplies of associated gas. This is important, one respondent said, because “worldwide demand for natural gas is extraordinarily strong.”
Precariously light supplies of gas in Europe, as well as lean stockpiles in parts of Asia and South America, have fueled massive global price rallies this year. The supply challenges have also spurred high demand for U.S. exports of liquefied natural gas, boosting Henry Hub futures.
With both gas and oil supply challenges, and with U.S. output still relatively soft, the global market is turning to the Organization of the Petroleum Exporting Countries (OPEC) and its allies, aka OPEC-plus.
Saudi Arabian Oil Co., aka Aramco, last week said the potential natural gas crisis had already boosted oil demand by 500,000 b/d, with portions of the power sector in Asia switching from gas to oil.
That is 100,000 b/d more than the pace of OPEC-plus increases currently in the works. The cartel earlier this month approved another 400,000 b/d production increase for next month, continuing a plan launched in August.
However, Rystad Energy analyst Louise Dickson said that, barring more aggressive OPEC-plus increases, supply could trail demand into 2022. “The supply response can only be described as lagging,” Dickson said, despite the “robust price environment.”
Read More: Oil, Gas Activity Accelerates as Prices Soar, Energy Companies Tell Kansas City Fed