Pessimism pervades oil, gas sectors due to US election uncertainty, lower prices: Dallas Fed

A curtain of pessimism appears to have settled over the US oil and gas industry in the third quarter as presidential election uncertainties loom and operators weather a challenging commodity price environment, according to the Dallas Federal Reserve Bank's latest energy sector survey released Sept. 25.

The survey generally encompasses questions dealing with price expectations, actual and anticipated drilling activity, oilfield service costs, employment and special questions on selected timely energy topics. And the results show executives at exploration and production and oil services provider companies are being cautious until they get more clarity on longer-term conditions.

On the outlook for upstream conditions, this "turned negative" during Q3, with the data suggesting "modest" pessimism, according to a summary statement. It added that the general outlook uncertainty index jumped 25 points to 48.6, suggesting "mounting uncertainty."

"Overall the key point from the survey is that oil and gas activity edged lower in the third quarter as outlooks dim and uncertainty grows," Senior Dallas Fed Business Economist Kunal Patel said during the organization's quarterly webcast press conference, adding that the price of crude oil during the third quarter survey period was down roughly $9 per barrel to $71/b from the last survey period, "which likely weighed on outlooks."

The organization's data was collected Sept. 11-19, with 136 energy companies responding, 91 of them exploration and production companies and 45 oilfield services providers.

Curtailed Permian output

A number of survey respondents cited persistently low natural gas prices as a particular challenge. Soon-to-be prompt NYMEX Henry Hub November gas futures settled at $2.79/MMBtu Sept. 24, CME Group data showed.

Asked the price they believed natural gas would be in the future, Dallas Fed respondents' average price was $2.57/MMBtu in six months, $2.85/MMBtu in a year, $3.24/MMBtu in two years and $3.89/MMBtu in five years, Fed data showed.

By contrast, for oil, respondents' expectations were an average of $73/b in six months, $76/b in a year, $81/b in two years and $87/b in five years.

Limited gas takeaway continues to choke Permian gas prices. At West Texas' Waha Hub, spot gas prices have been holding barely positive in September after an extended period of negative trading through the conclusion of summer. In August, Waha spot gas averaged minus $1.83/MMBtu, cratering to as low as minus $6.22/MMBtu on the last trade day of the month, according to data from Platts, part of S&P Global Commodity Insights.

When asked about the impact of low Waha gas prices on their operations in the Permian in Q3, roughly 35% of respondents reported having to curtail production, Patel said, while another 26% reported delaying or deferring well drilling, and 9% reported delaying or deferring well completions.

But 52% selected "other," with the majority of that percentage citing little to no impact on operations, followed by the second-biggest response, which was that the impact was reduced natural gas revenue, he said.

"Several of the past months I have received nothing or a negative adjustment to revenue for natural gas," one Permian operator said in response to the Dallas Fed's survey. "In June, one operator paid $0.09 per million cubic feet, which is above $0, but accrues little to my revenue."

That dynamic could be expected to last for months, if not years, the individual said.

Patel also noted most Permian wells are oil-prone, also having associated gas, so it was difficult to tell if the wells curtailed focused on oil or gas.

The data suggests that more upstream producers saw their production increase than decrease in Q3 compared with three months earlier, he said.

"So when whenever [respondents] mention that they are curtailing some amount of production, what it likely did was that they were expecting to see growth and then they actually saw a little bit less growth," he said.

While most producers do not expect to ramp up completions after the Matterhorn natural gas pipeline comes online, few E&P companies expect their crude production to be constrained due to oil pipeline limitations in the Permian between now and the end of 2026, Patel added.

The Permian boasts about 6.4 million b/d of crude oil and about 24.7 Bcf/d of natural gas, according to Q3 figures from the US Energy Information Administration.

Still, many respondents' comments were negative on the general near-term upstream industry outlook.

Price volatility impacts 2025 planning

"Recent [commodity price] volatility has started to impact planning discussions for 2025," one survey respondent said. (The Fed does not disclose identifying information on respondents but does publish pertinent comments as is.)

"We have not adjusted our plan yet, but we are starting to work on potential drilling plans for a lower commodity environment," the respondent added.

Many E&P operators talked about the US presidential election in November, featuring two candidates with vastly different outlooks on the energy sector.

As a result, "many" Fed survey respondents expressed concern over the outcome, and many openly stated that they were waiting for the results so they may plan accordingly for 2025, Patel said.

"There is work out there, but it is just being held until there is some certainty regarding energy policy," one oilfield services provider said.