Fear, Uncertainty Grip U.S. Shale Despite Price Optimism

Researched by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Companies looking for oil and natural gas in the U.S. shale patch should be relatively comfortable based on the current price of oil, survey results showed, though the overall outlook is uncertain.

Economists at the Federal Reserve Bank of Dallas interviewed 152 energy firm executives from December 7 to 15 to get a gauge of optimism in the sector. In manufacturing, the Fed found that growth resumed in December, though new orders slumped for the seventh straight month amid declining global demand.

The International Monetary Fund (IMF) suggested demand would deteriorate further this year, given that most major economies seem to be headed toward a recession. That should keep a lid on crude oil prices, which failed to be as influenced by the geopolitical risk premium emanating from the war in Ukraine as analysts expected.

Respondents to the Fed's energy survey expect West Texas Intermediate (WTI), the U.S. benchmark for the price of oil, to end 2023 at $83.63 per barrel. WTI on the first full trading day of 2023 was suffering heavy losses in pre-market moves, hovering near the $79-per-barrel range.

The margin should be encouraging. For capital expenditures, executives surveyed by the Dallas Fed said they were basing their plans on mid-$70 WTI and many--some 39%--said they expected at least a minor increase in spending next year.

Some of the shale patch optimism already may be showing up in the data. Crude oil production in the seven primary shale basins in the Lower 48 is expected to improve by 1% from December levels this month, while natural gas production output is forecast to increase by about a half percent.

In its latest short-term market report, the U.S. Energy Information Administration (EIA) said it raised its gas production forecast for 2023 by nearly 1%.

"Although we continue to expect natural gas production in the Permian Basin to be limited early in 2023 by the lack of pipeline capacity to bring associated natural gas production to market, we expect that these constraints will be resolved earlier than we had previously assumed," the EIA report read. "This change also contributes to slightly more crude oil production in 2023 than we had previously forecast."

Crude oil production is expected to average 12.34 million barrels per day (BBL/d) this year, which would be a record. The pace of increase from year to year is declining, however, and many observers believe shale is past its prime.

Despite the sense of optimism on spending and production, those surveyed by the Dallas Fed were concerned about everything from new hires--the talent isn't there, one respondent said--to supply-chain bottlenecks. Demand, meanwhile, remains a paramount concern given the prospects for recession.

Recent data from federal reserve districts suggest a U.S. recession is still possible this year and we'll get a better indication of the mood later this week with the release of the latest minutes from the Federal Open Market Committee. Economists at the Organization of the Petroleum Exporting Countries (OPEC), meanwhile, expect global oil demand to decline from 2.5 million BBL/d last year to 2.2 million BBL/d in 2023.

That all suggests a comfortable level of crude oil prices might not translate to overall optimism in the U.S. oil and natural gas sector. A lower-for-longer outlook bodes well for consumers in the form of lower gasoline prices, but it could be detrimental to long-term growth for energy companies looking for profits.

"We are girding ourselves for further cost increases in 2023," one respondent told the Dallas Fed. "This is against a backdrop of commodity price uncertainty and fears of demand destruction, owing to recession."

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).