How the September Beige Book Looks for the Oil, Gas and Energy Sector

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When investors and economists hear about a Beige Book release it is rarely a report that generates serious excitement. That said, there is almost always important information about the national economy or regional economies. There is also important news about certain business sectors and the prices of certain goods and services.

The Fed’s Beige Book release for September 12, 2018, included a lot of insight around the energy sector. Oil and gas executives, workers, forecasters and investors will not want to ignore some of the comments pertaining to energy. These comments came from multiple regional Fed branches.

As a reminder, each Beige Book comes from anecdotal information and from interviews with key business contacts, economists, market experts, and other sources in each region. The most important reminder is that the Beige Book is not a commentary on the views of Federal Reserve officials.

Also worth noting was that the September 12 report was prepared at the Federal Reserve Bank of New York and was based on information collected on or before August 31.

The Dallas Fed, which is at the heart of the energy sector, reported that its regional economic activity expanded at a solid pace. While the manufacturing and service sectors sustained a healthy pace of growth, activity in the housing and energy sectors was shown in a summary as being “flat to down.”

And on prices, the Beige Book, in general, did attribute some inflationary pressure to the energy sector. Overall producer prices rose moderately, reflecting pass-through costs of higher labor, materials, energy, and freight costs. Other information has been broken out partly in summary and partly verbatim.

One section of the Beige Book said that fuel refining capacity utilization continued at a record pace and also noted that crude production remained strong. Also worth noting was that exports of petroleum products continued to rise and contacts noted increasing activity offshore in the Gulf of Mexico. Utilities power generation projects picked up, and the contacts within the utilities sector continue to cite increases in the share of power generation from natural gas.

The Minneapolis Fed’s portion of the Beige Book said:

District oil and gas exploration activity as of late August decreased slightly from the previous report. Coal production in Montana increased from a year earlier.

The Federal Reserve Bank of Kansas City represented that energy activity across the District held steady while oil and gas production continued to rise. It said:

District energy activity remained steady since the last survey period, and contacts expected gains in the months ahead. The number of active oil rigs was unchanged, while the number of active gas rigs moderated slightly. Oil and gas production continued to expand, and contacts expected solid production increases moving forward. Oil prices were slightly lower than the peak levels reached earlier in the summer, but remained higher than levels in recent years.

The Federal Reserve Bank of Richmond said on overall prices that coal and crude oil prices increased in recent weeks while natural gas prices were stable.

The Chicago Fed spoke about oil and gas in the manufacturing sector, noting that demand for heavy machinery rose moderately, helped by growing demand from the construction and oil and gas sectors.

The Federal Reserve Bank of Dallas, which is again at the heart of the energy sector, made comments about wages, pricing and other issues in the energy sector. The regional report from Dallas said:

Upstream energy firms reported significant pressure to raise wages in the Permian Basin despite flattening of the rig count, and midstream and downstream energy companies also cited rising wage pressures, particularly for personnel with less than five years of experience… prices were flat over the reporting period. The price of West Texas Intermediate (WTI) crude oil remained in the high $60s; however, prices received by some producers were reportedly $10-$17 lower due to limited pipeline capacity.

Drilling activity in the Eleventh District leveled off as pipeline capacity constraints put downward pressure on prices received by oil and gas operators in the Permian Basin relative to major oil benchmarks like WTI. The smaller independent companies are being hurt by the lower wellhead prices, which are near or below their breakeven levels; however, so far the discounts are not deep enough to shut in production. In contrast, margins have improved for oilfield services firms that were able to increase prices earlier in the year. Outlooks remained positive as additional pipeline capacity is expected to be operational in 2019.

Before oil and gas watchers think this Beige Book is a clear thumbs-up or thumbs-down report, it’s important to go back to the cut-off date of this being on or before August 31. Nymex crude hit $70 at the end of August, roughly where it is today. This is roughly the same level that had acted as resistance on the charts back in May, June, and July.

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