Houston Energy Sector in Consolidation

Houston’s energy sector is consolidating in response to the reset in the global oil market. Drilling, engineering and service companies are reducing operating budgets and reducing staff by the thousands. Not only are drilling crews idled, but everything from automobile sales to shipping activity is being affected.

U.S. crude oil production appears to be levelling out after ramping up sharply since 2009. Inventories of crude oil in storage are also levelling out. Both are positive signs for stabilizing crude oil prices. Interestingly, some Texas drillers are preparing to bring more rigs into play is response to recently higher crude oil prices, potentially changing the production/storage relationship. This feels like an oil market that is still searching for equilibrium in terms of both prices and drilling activity.

The impact of the radical changes to the energy sector on the Houston economy are still unfolding. So far, we have seen a one-way drag since rig counts started falling at mid-year 2014. Recently we have seen oil prices firming to near $60, but that does not reverse the shock to the oil and gas industry and will not be enough to turn the tide of energy sector consolidation. If oil prices stabilize at $60 per barrel, or increase, we expect to see global drilling activity firm up in 2016, as existing production from shale reservoirs follows a rapid decline curve.

The Houston metro area added an average of 9,000 net new payroll jobs per month through 2014. In January, 3,700 jobs were shed. February saw a gain of 7,000 and then 4,400 were lost in March. We expect to see greater jobs losses in the Houston metro area economy in the months ahead as energy industry consolidation continues. We are forecasting a regional recession beginning in the second quarter of 2015 and extending through the first quarter of 2016. The length and depth of a regional recession in Houston will be, in large part, determined by the price of oil. Our assumption is that oil prices firm up gradually over the second half of 2015, to hit about $65 by the end of the year. We assume that the firming oil prices would stabilize drilling activity by 2016, and give Houston-area companies more confidence in their hiring by mid-year 2016.

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Click here for the complete Houston Regional Economic Update: Houston2015Q2.

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