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Indicators show Texas upstream oil and gas segment in contraction

According to the Texas Alliance of Energy Producers' Petro Index, the state's upstream oil and gas segment is several months into a contraction.

The Petro Index, created by Amarillo economist Karr Ingham, sat at 207.1 at the end of June, up 4.1 points from June 2018. The index's baseline was 100 in January 1995. In spite of the year-over-year improvement, Ingham said the index has dropped six out of the last eight months with many of the indicators making up the index sliding slightly.

"The oil and gas economy is in a mild state of contraction," he said. "It's not a catastrophic event, but it is a little unnerving. This should be a time of expansion."

There are negative signs across the board, save for production. Oil prices are down 19.5% from June 2018 and 13% from the start of the year, with natural gas prices in the state down 47% since last June. The rig count in Texas has dropped 12.5% since June 2018, and drilling permits issued are down nearly 13% from the start of this year. The Petro Index itself has dropped 2.9% since October 2018.

Even though West Texas Intermediate crude oil prices have remained between $50 per barrel and $60/bbl for much of this year, production will continue to increase at a rapid rate. Ingham said the state would almost certainly "destroy" its all-time record for production, set last year, with an estimated total of 1.85 billion barrels being produced throughout 2019.

Natural gas production is also shattering state records, which has become an unfortunate side effect for oil producers. The Petro Index estimates that Texas produced more than 812 Bcf of gas in June, a 9.3% increase from June 2018. The average price for gas in the state, however, was down almost 47% year over year to $1.30/Mcf.

"[Waha] gas prices have started to diverge from [the Houston Ship Channel prices] and have frequently been negative," Ingham said. "You can find gas prices that are $5 negative in the Permian on some days … Natural gas prices have been awful and continue to be awful."

The lack of pipeline infrastructure to carry natural gas may force operators in the Permian to cut back on their oil production, as the associated gas that comes with it is difficult to move and is a loser in the marketplace.

"[Low gas prices] have not been a price-affecting event out there before," Ingham said. "It is now."

With production still rising, no sign of a demand increase on the horizon and drillers smarting from steel tariffs imposed by the Trump administration, Ingham sees little reason to expect a positive bounce for the Petro Index in the second half of the year.

"I see continued sluggish crude prices. Natural gas prices will be no help at all," he said.