Kansas City Fed: Q3 Central US Drilling Shrank on Weak WTI

DAVENPORT, FL (DTN) – Drilling activity in the central U.S. continued to shrink in the third quarter as crude prices traded well below levels that would encourage a substantial increase in production, the Kansas City Federal Reserve said in a survey report.

In the key Tenth District, which includes a large portion of the Permian Basin and accounts for 37% of U.S. crude output, most energy producers scaled back drilling and defered investments as the price of WTI was below levels that would incentivize output, said the report published on Friday (10/10).

“Firms reported that oil prices needed to be on average $63 per barrel for drilling to be profitable, and $78 per barrel for a substantial increase in drilling to occur,” it added.

The NYMEX WTI crude futures contract for November was at $59.86 bbl on Monday (10/13) – still below the levels cited by the Kansas City Fed.

Nearly half of the firms reported slightly delaying investment decisions due to uncertainty, while a quarter significantly delayed them, aligning with the sector-wide cautious stance.

As a result, drilling and business activity index for the district registered a negative 16 reading — down sharply from the positive 6 in the first three months of the year — as producers cut back on operations.

“We are losing money producing oil… All fixed costs have gone up, including materials, pipe, pumps, and chemicals,” a respondent to the survey said.

The lower price levels have caused revenue and profits to fall to two-year lows, the survey showed.

Another participant noted that the “tremendous uncertainty in the markets currently has a negative effect on investment decisions.”

The results align with Baker Hughes data showing the total U.S. rig count fell by two to 547 as of Friday, 39 fewer than the same week last year. Most firms do not anticipate a rebound in drilling or capital spending over the next six months, the Kansas City Fed survey showed.