Leading Dallas Fed Indicator Negative on Low Oil Prices

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--The Federal Reserve Bank of Dallas said a leading economic indicator for Houston turned negative, due, in part to lower oil prices, just as OPEC+ opted to loosen voluntary production restraints.

The Fed on Friday reported that its leading index for the Houston economy, based on a range of factors from single-home sales to the price of West Texas Intermediate crude oil, turned negative by March.

"Weakness in single-family housing permits, lower oil prices and the recent decline in equity values are contributing significantly to the drop-off in the headline reading," it said. "The Houston Leading Index suggests job growth over the next three to nine months is going to decline, though how much remains highly uncertain."

West Texas Intermediate (WTI), the U.S. benchmark for the price of oil, was trading at about $57 per barrel early Monday, down about a half-percent from the Friday close. Markets by Monday were turning south on word that OPEC+, the core group of the Organization of the Petroleum Exporting Countries and non-member state allies such as Russia, opted to relax on voluntary production restraints.

Pointing to "healthy market fundamentals," the group on Saturday opted to increase production for the second month in a row, adding 411,000 barrels per day (BBL/d) of output beginning in June.

"This flexibility will allow the group to continue to support oil market stability," the group said.

Market fundamentals, however, are anything but healthy. U.S. President Donald Trump has upended global trade by his sweeping tariff agenda. Markets have whipsawed on his on-again, off-again tariff policies, which the World Bank said is making global investment plans difficult.

Ole Hanson, the head of commodity strategy for Saxo Bank in Denmark, said oil prices already are at multi-year lows, triggered in part by Trump's tariff agenda and now OPEC+.

"This move raised concerns about a potential global supply glut, especially at a time when trade tensions threaten to dampen demand," he said of the weekend supply announcement.

At home, the Dallas Fed already was concerned about job growth in Texas and recent trends in commodities only adds to the concern.

"Local job growth was probably slower than initially estimated in March and may slow further over the next three months," the Dallas Fed said. "This is likely due, in part, to firms adopting wait-and-see postures in response to heightened levels of uncertainty."

Meanwhile, the World Bank said that global commodity prices, when adjusted for inflation, are below the five-year average dating back to 2019, the year before the COVID-19 pandemic went global. The price of oil already is below the point at which many U.S. drillers can make a profit, and the Dallas Fed said recently that tariffs on steel and aluminum only add to sector pressures as U.S. producers do not make much of the tubular steel necessary for the industry.

The longer-term outlook is no better. The GDPNow forecast from the Federal Reserve Bank of Atlanta points to a first-quarter contraction in the U.S. economy, and federal estimates point to WTI staying in the upper-$50 range next year.

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