Low Commodity Prices Bruise Energy Sector Confidence

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--The latest energy market survey from the Federal Reserve Bank of Dallas found that lower commodity prices were bruising confidence in the sector.

Commodity prices are cooling off, along with the rest of the global economy, after the demand surge that followed vaccinations against the novel coronavirus that causes COVID-19 and a geopolitical risk premium from the outbreak of war in Ukraine in 2022 faded.

Inflation in the U.S. economy topped 9% in 2022, though the U.S. Federal Reserve has now opted to lower its lending rates as annual inflation moves closer to its 2% goal. West Texas Intermediate (WTI), the U.S. benchmark for the price of oil, touched $120 per barrel that year and Henry Hub, the benchmark for natural gas, flirted with $10 per million British thermal units (MMBtu).

The Dallas Fed's price survey found respondents pessimistic that WTI would reach $80 within the next two years. By 2026, Henry Hub should be around $3.24/MMBtu.

Even with a hurricane in the Gulf of Mexico and the potential for a widespread conflict in the Middle East, WTI was trading sharply lower in pre-market movements on Thursday to move near the $68-per-barrel mark. Henry Hub was at $2.88/MMBtu. Prices were lower on word that Saudi Arabia would shift from pursuing a price target to chasing a greater market share by putting more barrels on the water.

The 43% drop in oil prices and 71% decline in natural gas prices over two years is reason enough for concern, respondents to the Dallas Fed's energy survey for September said.

"Turbulent commodity pricing markets, specifically WTI crude oil and Henry Hub natural gas, do not allow for confident future performance projections when it comes to net income," one respondent said.

Lower prices, in turn, are curbing upstream output. Of those surveyed, 61% said lower natural gas prices would either curtail production outright or cause a delay in drilling activity. But only 8% said the same regarding the price of crude oil.

Production estimates from the U.S. Energy Information Administration (EIA), meanwhile, show crude oil production increasing from 13.3 million barrels per day (BBL/d) on average for 2024 to 13.7 million BBL/d. Natural gas output is expected to remain flat, especially in the prolific Appalachian Basin, until prices rebound.

The third-quarter 2024 earnings season could shed more light on sector sentiment, but firms in general have been favoring shareholder returns over investing in new activity. That said, at least one company, NRG Energy Incorporated (NYSE:NRG) (Houston), said separately from the Dallas Fed on Thursday that it was raising its earnings guidance by $175 million to a high point of $3.5 billion for the year.

In general, the Dallas Fed found that activity in the oil and gas sector declined slightly during the third quarter, with upstream services firms deteriorating the most.

"Sentiment has thawed very slightly from zero investors interested to one or two on the margin," a respondent said. "It is just brutal out there."

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