A new survey published by the Federal Reserve Bank of Kansas City on Friday revealed a slightly rosier outlook for oil and gas activity heading into the new year, even with the coronavirus pandemic far from over.
The quarterly survey asks companies a series of questions to gauge the overall health of energy activity throughout the 10th Federal Reserve district.
The district encompasses Wyoming, Kansas, Colorado, Nebraska and Oklahoma, along with parts of Missouri and New Mexico. The bank contacted companies between Dec. 15 and 31 to conduct the survey. Responses from 35 firms offer a window into how energy operators on the ground are faring after one of the most volatile years in U.S. oil and gas history.
“District drilling and business activity increased in (the fourth quarter), indicating some recovery from historic lows in 2020,” Chad Wilkerson, Oklahoma City Branch executive and economist at the Federal Reserve Bank of Kansas City, said in a statement. “However, firms are increasing output with fewer employees, and additional job cuts are expected. A significant share of firms have plans to reduce emissions moving forward, and most firms also expected higher regulatory costs in the upcoming year.”
Though indexes for revenue, capital expenditures and profits came out slightly better from the previous quarter, the fourth quarter survey also showed indexes for employment, wages and benefits in the sector worsening.
Indexes presented in the report are determined by subtracting the percentage of companies reporting increases from the percentage of companies reporting decreases.
In an effort to capture the current economic landscape in oil and gas, the survey collected information on several factors — employment, wages, revenue, access to credit, capital spending and more. Some of the indexes came back negative, another sign of just how devastating the economic downturn continues to be for oil and gas operators.
In order for drilling activity to substantially ramp up in the district, the price of oil needs to reach an average of $56 a barrel, according to participating firms. In turn, natural gas prices would have to rise to an average of $3.28 per Btu, respondents said.
Prices for West Texas Intermediate, the main U.S. benchmark for oil, opened on Tuesday at $52.18 per barrel. That’s a marked improvement compared to last spring when the price for oil sank to as low as $16.94 per barrel. (WTI front-month futures contracts sold for as low as negative $37 a barrel in April 2020.)
Still, churning a profit, especially in the Powder River Basin, at Tuesday’s price can be challenging for operators in Wyoming.
Survey respondents predicted energy activity would likely see a boost in the short term, with higher expectations reported than in previous 2020 surveys.
Within six months, firms on average predicted oil would land around $48 per barrel. In five years, the average prediction among respondents came out to $61 per barrel.
Many operators said in comments that a successful vaccination campaign against COVID-19 would be crucial to helping the oil and gas sector recover.
“With a successful vaccine deployment, oil demand will recover through 2021 with full recovery and return to growth by mid-2022,” one company stated. Another noted: “We will have a quick turn-around in the economy once the vaccine is widely distributed.”
But the anticipated rise in renewable energy also figured into companies’ projections.
“Renewable fuels and electric vehicles will impact peak global demand for oil,” one firm said. Another highlighted that the “momentum” behind renewable energy development would likely mean oil demand would peak “sooner rather than later.”
As demand for oil was increasing in the late 20th century, many in the U.S. feared the country would run out of it. That changed when the widespread adoption of technologies like fracking allowed oil and gas operators to unlock previously inaccessible hydrocarbons.
Fast forward to 2021, and the rapid deployment of renewable energy, coupled with the drop in fuel demand caused by the pandemic, has led analysts to shift their worries to the time when the world reaches “peak demand” for oil.
“Demand for oil both in the U.S. and globally has been rising steadily for decades, and peak demand refers to the moment in time when that stops, when we stop having a continual increase in demand,” explained Chuck Mason, a University of Wyoming economist and associate dean of research in the College of Business.
For instance, the expansion of electric vehicles, along with the adoption of wind and solar to produce electricity, will continue to chip away at the need for oil, natural gas and coal, he said.
“That is at the heart of peak demand: that the things feeding into demand for hydrocarbons are going to crest soon, certainly within the decade,” Mason said.
A majority, 75%, of survey participants said they anticipate oil demand reaching peak demand after 2025. About 9% expected peak demand would occur in the next two years, and 21% figured global oil demand would reach its peak between 2023 and 2025.
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