Energy Survey Points to Rising Costs, Slower Expansion of U.S. Oil Production

• Recently, the Federal Reserve Bank of Dallas surveyed 152 energy firms in Texas, Louisiana, and New Mexico
• According to the survey, the industry is expecting higher drilling costs and marginally higher oil prices in 2023
• Here are the four main takeaways from the survey

The Federal Reserve Bank of Dallas recently released its energy survey for Q4 2022. It surveyed 152 energy firms located in Texas, Northern Louisiana, and parts of New Mexico.

Two-thirds of these firms engage in oil and gas exploration and production, and one-third of them are oilfield service firms. These survey results can be useful for traders because they provide insight into the outlook and mindset of oil producers in the most prolific oil-producing region of the United States.

Here are some key points to keep in mind when considering the trajectory of U.S. oil production:

1. Rising Costs

The cost of drilling for oil and gas in the United States is still rising, although not as fast as last year. Along those lines, delays in the supply chain are still slowing down drilling activity.

The delays have decreased slightly but are still significantly elevated compared to previous years. This means that oil firms are not drilling as much as they technically could or would like to due to a lack of materials and higher-than-anticipated drilling costs.

2. Slower Expansion

According to the EIA, the U.S. produced 12.38 million bpd of oil in October 2022. This reflects a small increase from the previous month, whereas we saw much larger increases in production in April, May, June, and July of 2022.

Based on the energy survey results, it seems that the larger production increases seen in the spring and summer of 2022 are behind us. Production in the 4th quarter continued to grow, but at a slower pace than in the third quarter.

Traders should keep in mind that even though the EIA forecasts that the U.S. will be the largest source of non-OPEC oil production growth in 2023, this survey indicates that this growth may be more tempered than the forecasts predict.

3. Price Forecasts Reflect Current Conditions

When asked what they believe the price of WTI would be at the end of 2023, the average answer was $84 per barrel.

Just under 45% of firms think the price will be between $80 and $89 per barrel, while 25% of firms think WTI will end 2023 in the $70 to $79 per barrel range.

Notably, the spot price for WTI was $73.67 at the time of the survey.

Traders should not take this price forecast any more seriously than any other price forecast.

In fact, it has been shown that the price forecasts made by executives at oil firms are notoriously impacted by recency bias. Higher WTI spot prices during the period of the survey are correlated with higher end-of-year price forecasts.

For example, during the Q3 survey, the spot price of WTI was $85 per barrel, and most firms predicted WTI would end the year between $80 and $100 per barrel. The Q2 survey saw a WTI spot price of $119 per barrel, and 30% of firms believed that WTI would end the year in the $100-$119 range.

4. Capital Expenditures Expected to Rise

40% of oil firms expect to increase their capital expenditures slightly in 2023, and 25% expect to increase capital expenditures significantly. However, traders should know that this will not necessarily translate into more drilling due to higher costs.

In fact, 58% of oil executives said they see slight increases in input costs, and 10% forecast significant increases in costs. It is likely that the increase in capital expenditures is to keep up with rising costs.

I encourage traders interested in understanding the mindset of oil producers in the Permian to read some of the comments from executives in the survey. These comments are not necessarily applicable across the industry but provide insight into the issues impacting oil production in the most prolific region of the United States.

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I will be speaking with the economist who conducts the Dallas Fed Energy survey on the Energy Week Podcast next week. It will be released on Tuesday, January 17, through Substack.

Disclaimer: The author does not own any of the securities mentioned in this article.