Optimism Fades in Texas Oil Industry Despite Higher Oil Price

posted by Jim Forsyth - 

With the global price of oil rising and the Saudis openly, and somewhat wishfully, talking about oil again reaching $100 a barrel, you would think they would be all smiles in the Texas oil patch.

But 1200 WOAI news reports a new study by the Federal Reserve Bank of Dallas, says pessimism, not optimism, is taking hold.

The Business Activity Index, which measures the operations and future planning of energy firms in the Fed district, has dipped in the latest survey.

And while production continues to increase, employment is not growing at as high a rate, as automation takes over more jobs in the oil patch.

But Michael Plante, who is the Fed economist who studies the Texas oil and gas industry, says many drillers and producers are concerned that a lack of pipeline capacity in the Permian Basin may hamstring the state's oil industry at a time when growth should be the most robust.

"A large majority of respondents think pipeline capacity won't be sufficient until the last quarter of 2019, or later," he said.

While two large pipelines now in the works, Plains All American and EPIC, are in fact set to begin transporting oil to refiners and terminals in late 2019, analysts say railroads and trucks are not an option, leaving the Permian unable to ramp up production in the face of rising prices, and concerns over shortages due to pending restrictions on Iranian crude experts, as well as a collapse of the Venezuela oil industry.

And Plante says that leads to another problem..what are called 'price differentials.'  Differentials occur when West Texas Intermediate crude is selling for substantially less than Brent and other crudes.

"About 70% believe price differentials, oil is currently selling at a discount in the Permian, will have a slightly negative impact on oil production in the area over the next six months."

That is due to the fact that investment goes where the greatest return can be realized, which means producers will invest in fields other than the Permian.  There are also concerns among large oil futures buyers that the pipeline crunch will make it difficult for Permian producers to meet large contracts.

Several analysts say the differentials could push the increase in Permian production down 300,000 to 400,000 barrels a day below current predictions, further suppressing production.

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