Dallas Fed Expects Upstream Spending Cuts

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Early-year pessimism about the fate of the domestic energy sector remains valid as firms said they expected to cut capital spending, the Federal Reserve Bank of Dallas reported.

U.S. President Donald Trump embraced the energy sector during his two, non-consecutive terms in the White House, backing out of the Paris climate deal and scrapping renewable energy programs. Since his return to office, he's created a council of energy dominance meant to exploit the dominant position the United States already has in crude oil and natural gas.

But the sector has been mostly disappointed with his economic policies. He threatened an import tax on the top foreign supplier of crude oil, Canada, and enacted steep tariffs on aluminum and steel that impact everything from automobiles to pipelines.

Commenting in the so-called Beige Book, a summary of economic conditions across the various Federal Reserve Districts, the Federal Reserve Bank of Dallas said Wednesday that activity in the oil and gas sector had eased over the last six weeks.

"Exploration and production firms expect to cut capital spending in the second half of the year by more than initially planned, as rising overseas production will weigh on oil prices," it said. "Altogether, contacts now expect nearly flat production through December, as increased productivity offsets reduced investment in higher-cost wells."

On Wednesday, Saudi Arabia said it would lower the July price for Asian buyers of its crude oil. That follows four straight months where OPEC+, an umbrella group of the core members of the Organization of the Petroleum Exporting Countries and non-member state allies such as Russia, opted to loosen voluntary production restraint.

Pressure from the supply-side only added to headwinds coming from the downturn in the global economy that's expected from Trump's economic policies. West Texas Intermediate (WTI), the U.S. benchmark for the price of oil, started the year at $72.50 per barrel. Before the opening bell on Wall Street on Friday, WTI was down slightly to trade closer to $63 per barrel.

WTI fell below $60 earlier this year and remains below the point at which many drillers can make a profit. The federal government expects WTI to fall below $60 next year on average.

"Contacts noted a focus on drilling in the more oil-rich parts of the Texas Permian Basin, as the lower price environment makes other areas less economical," the Dallas Fed said.

Elsewhere, oilfield services firms such as Baker Hughes Company (Houston, Texas) and SLB (Houston, Texas) have faced increased costs from tariffs on steel, machinery components and equipment. Steel tariffs are a particular concern for the U.S. energy sector as the nation doesn't produce the type of metal used in oil and natural gas pipelines.

The Dallas Fed said about 60% of the firms it surveyed said they expected the tariff costs to trickle down by July, while 90% said they expected to see cost burdens emerge within three months.

"Outlooks generally deteriorated, and tariff uncertainty was making it hard for businesses to plan for the future," the Fed said. "Several contacts noted an erosion of consumer sentiment amid economic uncertainty."

The sour sentiment was already reflected in an early-year survey from the Dallas Fed. By March, not yet past the 100-day mark for the second Trump term, respondents to the Fed's quarterly energy survey said the administration was a disaster for commodities.

"Tariff policy is impossible for us to predict and doesn't have a clear goal," one respondent said. "We want more stability."

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