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Drop in energy prices lowers the boom in Texas oil patch

August 1, 2012
by Zain Shauk

Falling oil prices halted a 30-month growth spurt in Texas’ oil and gas industry boom in June, a new industry report shows.

The Texas Petro Index, which has measured job numbers, rig activity, production totals, wells completed and other related figures across nearly two decades, dropped for the first time since a rush to draw oil from shale caused a surge of drilling in Texas.

The index fell to 270.4 in June from its recent peak in May of 271.5, which was the highest since rapid industry growth pushed it to a record 287.8 in October 2008.

A trend of declining oil prices added to already low natural gas prices to push the Petro Index down, said Karr Ingham, an economist for the Texas Alliance of Energy Producers, which released the study Tuesday.

He said the number of active oil and gas rigs in Texas has fallen further in recent weeks to 900, the lowest level since September 2011, as companies have reassessed expensive operations that are no longer yielding high returns.

Not coincidentally, he said, oil prices have fallen from near $100 in early 2012 to about $79.08 in June. Benchmark crude lost $1.72 Tuesday to end the day at $88.06 per barrel.

Companies may have grown more cautious about aggressive drilling operations, but the leveling off doesn’t necessarily mean a bust is on the horizon, said Michelle Michot Foss, chief energy economist for the University of Texas Center for Energy Economics.

“They’re trying to get a feel for what the price trajectory could be and it’s affecting decisions,” Foss said. But, she added, “I think you would need a much, much more substantial fall in prices to see a really serious drop in activity.”

Contraction ahead?

Texas employment in the fossil-fuel exploration and production industry hit a record of 251,600 in June, Ingham said. But he noted some indicators that point to possible contraction ahead. Texas crude oil production is at its highest level since 1999, but the weakening world economy is pushing demand down, he said.

That has left resource prices languishing.

The recent 30-month rise in the Texas Petro Index was almost exclusively fueled by oil drilling because low prices have curtailed natural gas production relative to its levels in previous expansions.

The monthly average value of Texas oil and gas production exceeded $9 billion in 2008 but has been around $6 billion during the most recent peak in the index, Ingham said.

During the current shale-driven boom, however, employment has soared well above levels in October 2008, he said.

If declining prices bring about a further reduction in drilling activity, Ingham said, “employment will ultimately be affected and there’s of course no way it could not be.”

European crisis

Turmoil in Europe and a weakening domestic economy have also affected the industry by depressing oil prices, Ingham said.

“All of these terrible things happened in the second quarter and sort of threw a little bit of rain into our parade,” he said.

But Texas oil prices and drilling activity may not be as influenced by broad economic trends as they may have been by recent pipeline developments, said Ed Hirs, a professor of energy economics at the University of Houston.

A recent increase of pipeline capacity bringing oil to the U.S. Gulf Coast may also be pushing prices down, he said.

“Right now you’ve got more domestic supply coming online than the country is accustomed to handling,” Hirs said.

The alliance’s index dates to 1995, when the index was set at a base level of 100.

Source

GIGANTIC MISS: DALLAS FED REPORT PLUNGES TO -13.2

Joe Weisenthal

Texas factory activity continued to increase in July, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell from 15.5 to 12, suggesting slightly slower output growth.

Other measures of current manufacturing activity also indicated slower growth in July. The new orders index was positive for the second month in a row, although it moved down from 7.9 to 1.4. Similarly, the shipments index posted its second consecutive positive reading but edged down from 9.6 to 7.4. The capacity utilization index came in at 8.7 after rising to 13.3 last month.

Perceptions of broader economic conditions were mixed in July. The general business activity plummeted to -13.2 after climbing into positive territory in June. Nearly 30 percent of manufacturers noted a worsening in the level of business activity in July, pushing the index to its lowest reading in 10 months. The company outlook index remained positive for the third month in a row but fell from 5.5 to 1.6.

Labor market indicators reflected stronger labor demand. Employment growth continued in July, although the index edged down from 13.7 to 11.8. Twenty-one percent of firms reported hiring new workers, while 10 percent reported layoffs. The hours worked index was 4.1, up slightly from its June reading.

Price pressures were largely unchanged in July, although compensation costs rose at a faster pace. The raw materials price index held steady at 3, suggesting only slight increases in input costs this summer after strong upward pressure earlier in the year. Selling prices fell for the fifth consecutive month in July; the finished goods price index was -5.5, virtually unchanged from last month’s reading. The wages and benefits index rose nearly 10 points to 22.9, largely due to a marked rise in the share of firms noting increased compensation costs. Looking ahead, 36 percent of respondents anticipate further increases in raw materials prices over the next six months, while 25 percent expect higher finished goods prices.

Expectations regarding future business conditions were less optimistic in July. The index of future general business activity slipped from 1.3 to -7.3, registering its first negative reading in 10 months. The index of future company outlook remained positive but fell from its June level, coming in at 5.3. Indexes for future manufacturing activity also decreased, although all remained in strong positive territory.

The Dallas Fed conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity. Data were collected July 17–25, and 89 Texas manufacturers responded to the survey. Firms are asked whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month.

Survey responses are used to calculate an index for each indicator. Each index is calculated by subtracting the percentage of respondents reporting a decrease from the percentage reporting an increase. When the share of firms reporting an increase exceeds the share reporting a decrease, the index will be greater than zero, suggesting the indicator has increased over the prior month. If the share of firms reporting a decrease exceeds the share reporting an increase, the index will be below zero, suggesting the indicator has decreased over the prior month. An index will be zero when the number of firms reporting an increase is equal to the number of firms reporting a decrease.

More to come… Source

The Evidence Of A Coming Recession Is Overwhelming

by Comstock Partners

We first noticed the first signs that the economy was beginning to soften about three months ago.  Now the evidence of a slowdown has become so overwhelming that it is difficult to avoid the conclusion that we are headed for a recession.  We cite the following as evidence.

Retail sales (both total and non-auto) have dropped for three consecutive months.  This has happened only five times since 1967—-four times in 2008, and one now.  Vehicle sales have tapered off with May and June being the two weakest months of the year.  Consumer confidence for both the Conference Board index and the University of Michigan Survey are at their lowest levels of 2012.

On the labor front, June payroll numbers were weak once again and averaged only 75,000 in the second quarter. The latest weekly new claims for unemployment insurance jumped back up to 386,000 and the last two months have been well above the numbers seen earlier in the year.

The ISM manufacturing index for June fell 3.8 points to 49.7, its first sub-50 reading in the economic recovery.  The ISM non-manufacturing index for June dropped to its lowest level since January 2010.  Most recently the Philadelphia Fed Survey for July was negative (below zero) for the third consecutive month.

The small business confidence index declined in June to its lowest level since October and has now dropped in three of the last four months.  Plans for capital spending and new hiring have dropped sharply.

Despite all of the talk about a housing bottom, June existing home sales fell 5.4% to its lowest level since the fall of last year.  In addition mortgage applications for home purchases have been range-bound since October.

Core factory orders, while volatile on a month-to-month basis, have declined 2.6% since year-end, and the ISM numbers cited above indicate the weakness is likely to continue.

The Conference Board Index of leading indicators has declined for two of the last three months and is now up only 1.4% over a year earlier, the lowest since November of 2009, when it was climbing from recessionary numbers.  The ECRI Weekly Leading Index is indicating a recession is either here now or will begin in the next few months.

The breadth and depth of the slowdown are greater than the growth pauses experienced in mid-2010 and mid-2011, and indicate a strong likelihood of recession ahead.  In addition the foreign economies will be a drag as well.  A number of European nations are already in recession and others are on the cusp.  The debt, deficit and balance sheet problems of the EU’s southern tier are a long way from any solution, and will not remain out of the news for long.  China is coming down from a major real estate and credit boom, and is not likely to avoid a hard landing.  The Shanghai Composite is in a major downtrend, declining 28% since April 2011.  The view that China is immune because of their unique economic system reminds us of what people were saying about Japan in 1989.

The stock market is ignoring these fundamentals as it did in early 2000 and late 2007 in the belief that the Fed can pull another rabbit out its hat.  It couldn’t do it in 2000 or 2007 when it had plenty of weapons at its disposal.  Now there is little that the Fed can do, although it will try since it will not get any help, as Senator Schumer so aptly pointed out at Bernanke’s Senate testimony.  In sum, we believe that the stock market is in store for a huge disappointment.

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