Dallas Fed outlook surveys indicate manufacturing, service sectors improving

Texas manufacturing and service sector activity increased in February, but the Federal Reserve Bank of Dallas surveys were conducted only partly after a polar vortex prompted rolling blackouts for millions of homes and businesses, resulting in extremely high wholesale power prices along with manufacturing and service business shutdowns.

The Dallas Fed's Texas Manufacturing Outlook Survey's production index, a key measure of economic activity, rose to 19.9 in February from January's seasonally adjusted 4.6 and a seasonally adjusted 16.8 in February 2020. The index shows the percentage-point difference between respondents indicating increased activity and those who indicate decreased activity.

The Dallas Fed's Texas Service Sector Outlook Survey's revenue index, another key measure, showed improvement to 2.6 in February from January's 0.8, but the February 2020 number was 14.3, just before the coronavirus pandemic slammed into the Texas economy. The index represents the percentage-point difference between respondents indicating increased revenue and those indicating decreased revenue.

Both surveys were conducted Feb. 9-17, and the polar vortex hit Texas the night of Feb. 14-15, resulting in widespread snow and ice, natural gas freeze-offs, and about 40 GW of generation -– renewables, fossil fuel and nuclear -- dropping offline, which prompted the Electric Reliability Council of Texas to implement rolling blackouts across its footprint.

The Texas Service Sector Outlook Survey's results released Feb. 23, and the Texas Manufacturing Outlook Survey's results were released Feb. 22.

"Optimism surrounding vaccination as well as limited impacts from the pandemic are likely feeding optimism in Texas," said Kieran Kemmerer, a power market analyst at S&P Global Platts Analytics. "Our estimates suggest that electricity demand growth on a weather-adjusted basis resumed and has been ongoing since October 2020."

As a result of the generation outages, day-ahead on-peak locational marginal prices at the ERCOT North Hub, for example, hit a record high of $8,800/MWh for delivery over Feb. 17.

Looking toward electricity prices in the coming month, Kemmerer said in a Feb. 23 email. that "even substantial year-on-year weather-adjusted growth is unlikely to have a profound effect on wholesale power prices, given the expectation for ample supply."

"As demonstrated in February, extreme weather remains the biggest risk to power prices from the demand side," Kemmerer said.

Refining, LNG activity

The polar vortex that struck Texas Feb. 14-15 knocked offline more than 75% of the state's oil refinery capacity.

Nearly 2.7 million b/d in refining capacity began restart activities in the week of Feb. 22, including North America's largest refinery, Motiva Enterprise's 607,000 b/d Port Arthur Refinery, which may not be fully operational though until March 11, according to an estimate in a new filing with the Texas Commission on Environmental Quality.

However, about 1.7 million b/d in refining output remained down on Feb. 23 without yet restarting, mostly in the Houston area. And some refineries still were only partially operational throughout Texas.

Also, in the week ended Feb. 20, flows into the Texas Gulf Coast's two LNG export terminals were severely curtailed by the winter freeze-offs and possibly by sales within the state, as Gov. Greg Abbott on Feb. 17 banned the transport of natural gas outside of Texas through Feb. 21.

On Feb. 16, Texas LNG plants intake of natural gas totaled just 427 MMcf/day, but this had rebounded to 2,329 MMcf/day on Feb. 22, according to S&P Global Platts data. Under normal circumstances, these two plants collectively process 3,800 to 4,000 MMcf/day.

Pandemic effects

Improved perception of economic conditions in Texas may reflect optimism related to the pandemic, as vaccines have become more widely available, and the infection rate has fallen in recent weeks.

In a Feb. 23 email, Campbell Faulkner, senior vice president and chief data analyst at the interdealer commodity broker OTC Global Holdings, said, "The survey results seem to align (could be cognitive bias) with the overall positive outlook for the Texas economy given the likelihood of herd immunity/vaccination results beginning to take effect."

Texas has the second-largest total of COVID-19 cases, at 2.6 million, and the third-largest death toll, at 42,562, according to Worldometers.info, which obtains information from federal, state and local public health agencies.

However, the seven-day rolling average of new COVID-19 cases in Texas was 5,012/day as of Feb. 22, down from the all-time peak of 23,563 on Jan. 15. The seven-day rolling average of deaths on Feb. 22 was 138/day, down from the all-time peak of 344 on Jan. 27.

"[The] overall economic effects caused by last week's rotating power outages along with damages to property and plant are extremely difficult to factor in at this time," Faulkner said.

Faulkner cited as possible wild cards affecting power prices going forward issues such as generation plant damage assessments, upcoming weather, regulatory or legislative changes to the ERCOT model, and potential involvement of the Federal Energy Regulatory Commission.