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Energy firms across the Midcontinent and Rocky Mountain region said they needed a 21% sequential increase in the average natural gas price to warrant a substantial increase in drilling during the third quarter, the Federal Reserve Bank of Kansas City reported last week.
The energy survey by the Federal Reserve branch, aka the Kansas City Fed, found that the Henry Hub gas price needed to spur growth was $7.65/MMBtu, up quarter/quarter from $6.34.
The substantial increase gas prices for the two previous quarters were $4.53 in 1Q2022 and $4.27 in 4Q2021 across the Kansas City Fed’s Tenth District territory, which spans Colorado, Kansas, Nebraska Oklahoma, Wyoming and parts of Missouri and New Mexico.
Tenth District energy firms participating in the Sept. 15-30 survey also reported a 4% increase in the West Texas Intermediate (WTI) oil price needed to drill substantially more: from $98/bbl in 2Q2022 to $102 in 3Q2022. The substantial increase oil prices for the two previous quarters were $86/bbl in 1Q2022 and $73 in 4Q2021.
In terms of the average prices needed for drilling to simply turn a profit in 3Q2022, Kansas City Fed survey participants reported averages of $4.42/MMBtu for natural gas and $61/bbl for WTI oil.
“Despite the pace of growth slowing slightly, District drilling and business activity remained solid in Q3,” said the Kansas City Fed’s Chad Wilkerson, economist at the Oklahoma City branch.
Among the 32 energy firms participating in the survey, one called commodity pricing curves “very steep” and not supportive of investment projects.
“We expect continued spending restraint by public companies with focus on returns to shareholders,” the participant said. “Spending will be tightly controlled until the demand structure is better defined.”
The respondent added that “more downsides exist due to restrictive government policy on developing oil and gas reserves and inflationary pressure on supplies and services than upside from demand growth.”
Another participant said that “shareholder pressures to not grow quickly and dramatically reduced access to drilling on federal lands” translates in the inability of U.S. supply growth to meet world demand growth.
“The acreage in many plays has been high-graded and consolidation will lead to fewer players drilling,” the respondent said.
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Survey participants also offered their thoughts on the direction of oil and gas prices. Six months from now, they expect WTI to average $88/bbl and the Henry Hub to average $7.46/MMBtu.
Respondents also anticipate a $89/bbl WTI price in one year, compared to $90 in two years and $93 in five years.
The Henry Hub average price forecasts are $6.48/MMBtu a year from now, followed by $6.16 in two years and $6.51 in five years.
A majority (79%) of survey respondents also indicated they expect the oil market to significantly tighten by late 2024 given underinvestment in exploration. An even larger majority (97%) reported that they foresee either “some” or “many” financial investors would return to the oil and gas sector.
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Related topics: Midcontinent Rocky Mountains
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