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3 Oil Price And Production Insights For 2022 From Dallas Fed Energy Survey

Published 01/06/2022, 04:59 AM
Updated 07/09/2023, 06:31 AM

At the end of December, the Federal Reserve Bank of Dallas released the results of its fourth quarter energy survey which included data collected between Dec. 8–16 from 90 exploration and production firms and 40 oil services firms.

Crude Oil WTI Weekly Chart

Below are some insights from the survey and what they mean for the future of U.S. oil production and oil prices.

1. Production costs are skyrocketing

This was the third straight quarter in which the costs for production escalated. However, it is notable that the rate of increase in Q4 was the fastest in the five years the survey has been conducted.

Firms reported increases in costs across the board, including exploration and development, lease operating expenses and personnel. In fact, rising costs featured prominently in the comments section with executives expecting that difficulties producing supplies and inflation will impact drilling and well completion in 2022. Executives also mentioned labor shortages and difficulty finding qualified employees as a factor that will limit production.

Inflation is clearly playing a role in increased costs of oil production and these costs will likely be passed down to consumers. Even if expenses don’t continue to increase, they are likely to remain elevated and will help keep a floor on oil prices. It is also likely that increased costs will crimp production growth in 2022.

2. Price forecasts are modestly higher

132 executives provided their WTI price forecast for the end of 2022. The average price forecast was $74.69 per barrel. 74% of respondents think that WTI prices will be in the $70 to $85 range by the end of 2022.

However, firms report that when planning capital expenditures for 2022, they based their plans on an average WTI price of just $64 per barrel. These price forecasts are less optimistic than many of the major banks, like Goldman Sachs, Citibank, and Morgan Stanley, which forecast prices rising to the $80 and $90 range in 2022.

It is important to understand these price forecasts within their proper context. Recently, the trend has been for banks to over-estimate oil prices while U.S. oil firms have tended to under-estimate them. For example, respondents to the Q3 survey, (conducted Sept. 15–23, 2021 when the spot price was around $72 per barrel), put the average price for WTI at the end of 2021 at $69.99 per barrel.

In fact, the price of WTI on Dec. 30, 2021 ended up being $76.99 per barrel. On the other hand, in October, many of the big banks believed the price of Brent would hit $90 per barrel in December 2021. Obviously, it did not, and those banks were too optimistic.

Oil firms, especially those in the U.S., may tend to under-estimate future prices because their most recent experience has been one of extremely low pricing. Many firms were traumatized by the long period of depressed prices that began in 2015 and were especially affected by the total collapse of WTI in the spring of 2020.

As a result, firms are likely being extra conservative and under-investing in capital expenditures considering where oil prices are likely to fall in 2022.

3. Production growth a priority, especially for small firms

Despite rising costs, labor shortages, regulatory uncertainty and a lack of capital from financial institutions, nearly 50% of firms listed production growth as their top priority for 2022. However, this doesn’t mean that traders should necessarily expect to see major jumps in total U.S. production in 2022.

Smaller firms (defined by the survey as producing less than 10,000 bpd) overwhelmingly listed production growth as their main goal, whereas large firms (defined as producing over 10,000 bpd) were more likely to list reducing debt as their top priority for 2022. Because these firms are so small, even if they double their production capacity in 2022, the amount is unlikely to make a significant impact in the larger picture of U.S. production in 2022.

Latest comments

Ellen, How many dollars do you think oil will drop if an agreement on the Iran deal occurs?  Assuming everything else stayed the same.  Thanks.
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How does LOE have any effect on oil prices. It's a commodity - supply and demand rule. LOE costs are not passed to consumers in the same way retail are.
whats LOE?
Embarrassing.  As usual.  Perma bear.   "In fact, the price of WTI on Dec. 30, 2021 ended up being $76.99 per barrel. On the other hand, in October, many of the big banks believed the price of Brent would hit $90 per barrel in December 2021. Obviously, it did not, and those banks were too optimistic." Brent finished the year at $80.  You only threw WTI price in that paragraph for effect because it's $3 lower than Brent.  Back in October there wasn't this little thing called Omicron that would basically ruin December.  If not for that Brent would have hit $90.  Once Omicron blows through look out.
I'm not sure how you could interpret this column as bearish. I gave 3 reasons why US producers look like they won't be growing production that much in 2022, which is a bullish indicator for oil prices. The price example I used was simply to illustrate how oil company executives are much more conservative in their oil price forecasts than financial institutions are, which I attribute to being traumatized by very low prices for years prior and then watching WTI go negative in 2020. The point is that people shouldn't assume that oil companies are basing their budgets/capital expenditures off of where oil prices are, or bank forecasts, but are actually using lower numbers.
 Okay.  I get all that.  But you're a bear.  That's fine.  My point was you are writing about BRENT predictions not being met by big banks targets then you list the price of WTI, because it's lower obviously.  Why didn't you post the price of BRENT since you're talking about BRENT.  These things are little slights most people wouldn't pick up on but I've read enough of your articles to know better.  Also, state the reason why BRENT did not hit their targets.  You stated that was their target back in October.  Well Omicron wasn't a thing back in October.  Bank estimates came down after the new variant came out.  Look, this doesn't really matter to me much but I call it as I see it.  It's all good.  Happy Investing!
 Ellen, How many dollars do you think oil will drop if an agreement on the Iran deal occurs?  Assuming everything else stayed the same.  Thanks.
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