Key facts
- U.S. oil executives expect a slight increase in domestic oil production.
- Geopolitical uncertainties and regulatory issues are creating an uncertain long-term outlook.
- Oil and gas activity saw its fastest pace of growth in four years in the second quarter.
- Input costs for oilfield service firms have risen significantly due to labor and fuel expenses.
- Executives anticipate 2% to 3% production growth at current prices.
- Many believe the oil market's structure has been permanently altered.
U.S. oil executives anticipate a slight increase in domestic oil production at current prices, but geopolitical uncertainties and regulatory issues are clouding their long-term outlook, according to a Dallas Fed survey. The survey, which collected data from June 9 to June 17 from 124 oil and gas firms, indicated that oil and gas activity increased at its fastest pace in four years during the second quarter. However, this growth was accompanied by mounting cost pressures, with input costs for oilfield service firms jumping dramatically due to higher labor and fuel expenses.
Most oil companies expect a small increase in production, with internal expectations for 2% to 3% growth at current prices, which were trading around $70 a barrel for West Texas Intermediate (WTI) crude. Executives noted that rapid changes in international geopolitics create a "cloudy windshield" view of future oil price and demand direction. One exploration and production executive stated that predicting crude oil prices with certainty is difficult under current conditions, even with a ceasefire agreement in the Iran conflict, and anticipates higher prices for both crude oil and natural gas for several months.
When asked about the potential peak price for WTI this year if the Iran conflict continues through year-end, two-thirds of respondents predicted prices would peak at $125 or less, while 20% expected it to be between $125 and $150. Many executives do not expect the oil market to return to previous conditions, believing markets have been permanently re-ordered, with the risk premium for oil originating from the Persian Gulf expected to persist. One oil and gas services executive highlighted that a 65% rise in diesel costs has partially offset revenue growth, and another noted that equipment pricing has not kept pace with inflation.