Federal Reserve: November Energy Indicators

Softening oil prices and price expectations, negative stock market returns and tightening credit conditions are putting downward pressure on industry activity and employment. In electricity markets, natural gas and renewables are replacing coal generation as real residential electricity prices have moderated.

Oil Prices

Average benchmark crude prices popped up by about $2 in September due mainly to the bombing of Saudi oil infrastructure, which disrupted nearly 6 percent of global supplies mid-month.

However, prices soon returned to pre-attack levels, and average crude prices in October were on par with those in August. Brent crude slipped to $60, and Houston (Magellan East pipeline) fell to $57 (Chart 1).

Midland crude—closer to the wellhead in West Texas—slipped to $55 but remained above the industry average breakeven price for drilling a new well, as reported in March 2019.

Energy Stock Market Returns

Energy sector total returns have eroded sharply in 2019 as lower oil prices and rising concerns for global demand pushed stock values lower despite improvements in cash flow among many firms (Chart 2).

From March to October, the compound annualized loss rate was 33 percent for exploration and production (E&P) firms (excludes integrated oil and gas companies such as Exxon Mobil), 43 percent for equipment and services firms, and 10 percent for midstream firms.

The growth rate accelerated to 30 percent for refining and marketing companies, due in part to a steep recovery in refiner gasoline margins from first-quarter lows and to strong third-quarter results.

In contrast, the S&P 500 index saw an annualized total return of 15 percent from March to October, and it has consistently earned higher returns than the energy sector the past few years, meaning the opportunity cost of investing in energy has been high.

High-Yield Energy Credit Spread

The divergence in returns and in investor interest between energy and the broader market is making it harder for energy firms to borrow in the high-yield credit market.

The option-adjusted spread between energy high-yield debt and non-energy high-yield debt in the U.S. rose to 413 basis points on Oct. 25 (Chart 3). That is the highest spread since April 2016, when the industry was still reeling from the deepest oil bust since the 1982–86 collapse.

Worsening conditions have led to increased layoffs and bankruptcies. Law firm Haynes and Boone has identified 33 E&P bankruptcy filings in 2019 through September, up from 28 in all of 2018.

There have been 15 oilfield services filings in 2019—11 of them over the summer months versus 12 total filings in 2018.

Employment

Texas oil and gas jobs slipped in September (Chart 4). Oil and gas extraction (mostly E&P firms) dropped 740 jobs, bringing year-to-date total growth in the sector to 4,290 in 2019. Support activities for mining jobs (mostly oilfield services firms) extended a decline that began after April 2019.

That sector is down 10,530 jobs from its recent high.

The risks around industry employment are weighted to the downside for the foreseeable future. Lower expected global gross domestic product growth in 2020 and ample projected crude-supply growth from countries like Norway, Brazil and the U.S. are likely to keep crude prices from rising substantially next year should projections prove true.

Most industry contacts continue to expect the U.S. rig count to decline through early 2020, and operational efficiency, well productivity and automation are broadly expected to increase going forward, keeping downward pressure on labor demand.

Electricity

Natural Gas, Wind and Solar Replacing Coal

Seasonally adjusted electricity generation has been stable since 2010. Since then, low-cost natural gas and rising wind and solar generation have displaced coal-fired power, which has fallen over 55 percent from its peak in April 2008 (Chart 5).

Over that time, the number of kilowatt hours generated from natural gas has risen 72 percent, and the number from wind and solar combined has jumped 786 percent (from a very small base).

Texas Residential Prices Up Since 2018

Seasonally adjusted real residential electricity prices rose in Texas from 10.11 cents per KWh in January 2018 to 10.70 cents in May 2019 (Chart 6). Since then, prices have fallen only slightly to 10.60 cents.

Texas residential electricity costs have been trending down relative to those in the U.S. as a whole over the past 10 years, in part due to falling natural gas prices.

Since the Great Recession (December 2007 to June 2009), natural gas prices have declined by more than half relative to the 2000–07 period, thanks to surging production from U.S. shale. Natural gas represented nearly 46 percent of Texas generation in 2018, whereas nationwide it was 35 percent of the mix.