US oil and gas outlook improving: Fed survey

OREANDA-NEWS. July 14, 2016. The outlook for oil and gas is improving in key US onshore producing regions, according to the Federal Reserve's latest survey of US business activity.

The improved outlook reflects expectations that crude and natural gas prices will not return to low levels seen earlier this year. But producers are not making immediate changes to business plans as they wait for the higher prices to hold longer, according to the Fed's Beige Book survey released today.

"The worst is likely over, but there is little hope for substantial growth in activity or employment before 2017," respondents said in the Dallas district, which covers Texas and parts of New Mexico and northwest Louisiana. The survey covers the period since late May. The Nymex light, sweet crude front-month contract since the end of May declined by 4.7pc, settling at \\$46.80/bl yesterday. But it has almost doubled from a low of \\$26.21/bl on 11 February.

Producers in the Kansas City district, which covers a large part of the midcontinent and some Rocky Mountains states, expected oil prices to increase by the end of this year. Respondents in a more targeted survey by the Federal Reserve bank of Kansas City, released last week, predicted that WTI would rise to \\$53/bl by the end of 2016 and to \\$62/bl by the end of 2017.

Even with the improved outlook for the sector, oil and gas producers did not expect significant changes to their credit availability and projected more defaults, bankruptcies, mergers and acquisitions, the Beige Book survey said.

But there is no systemic risk to US banks from the energy sector slowdown, Federal Reserve Bank of Dallas director of research Mine Yucel said on 12 July at a conference the US Energy Information Administration (EIA) hosted in Washington.

US producers surveyed by the Fed expected oil market fundamentals to tighten later this year, in part because of the declining US output.

US crude production should fall to 8.6mn b/d in 2016 and to 8.2 million b/d in 2017, from an average of 9.4mn b/d in 2015, the EIA projected in its latest Short-Term Energy Outlook. The agency expects global oil inventories to build through the third quarter of 2017, when rising demand finally overtakes sluggish supply.

Oversupply in the market may vanish even faster at prices near \\$50/bl, consultancy Rystad Energy partner Lars Eirik Nicolaisen said yesterday at the EIA conference. Shortfalls loom ahead for crude markets as producers globally have responded to price declines with sharp declines in capital expenditures, he said.

"We are not believers in a flat \\$50/bl [price projection] going forward. Supply at \\$70/bl declines after 2017, and at \\$50/bl, it will decline this year," Nicolaisen said.