The Texas Permian Basin Petroleum Index in August posted its first monthly increase in 21 months (since peaking in November 2014), increasing by a tenth of a point to 208.6 up from 208.5 in July. The increase is small, and the regional oil & gas activity index remains down by 28% year-over-year; however, the turn upward is a long-awaited milestone, and with a couple of caveats may signal the technical end of the contraction in the Texas Permian Basin energy exploration & production economy.
The Odessa Economic Index remains in contraction through August, however, declining again to 196.1 for the month down from 197.4 in July (revised slightly upward from the original 197.3 due to an upward revision in employment and home sales data for July), and down 12.2% from the August 2015 OEI of 223.2.
Should the August increase in the Texas Permian Basin Petroleum Index ultimately hold up, the contraction in the regional oil & gas E&P economy will have lasted 20 months, with the index peak in November 2014, and the index trough in July 2016. However, a little more time is required to determine whether or not the July 2016 index nadir indeed represents the turning point from industry contraction to expansion. First and foremost, obviously, prices and activity levels could stall and retreat at some point in the near future, which might possibly send the index back into contraction. Beyond that, some of the current index data could be revised at some future point which would result in a recalibration of the index at that point. The most likely candidate is the oil & gas employment data, which is subject to slight revision next month, and may potentially undergo a major revision in early 2017.
Again, though, this particular very slight turn upward is encouraging, and the likelihood is that it does indeed signal the cyclical low point in the current contraction. The index is designed to minimize month-to-month volatility and only experience turning points when the change from contraction to expansion (or vice versa) is the real deal. The change in crude oil prices from the February low point and the resulting response in the Permian Basin rig count suggest that that is the case.
The monthly average rig count improved to 160 in August (again, we use the sum of the monthly average rig counts for Railroad Commission Districts 7C, 8, and 8A), up from 139 in July, and the low point of 121 in May. The weekly count has reached as high as 169 in September for that region. The number of drilling permits issued in that same region has yet to reach a discernible bottom; the number of permits issued through August is still down by close to 20% compared to the first eight months of a year ago, which in turn was down by 55% compared to the previous year.
At the very least, the time between a turning point in the regional oil & gas economy and the Odessa general economy as reflected by the Odessa Economic Index would be 3 months or so, and even that would presume the rapid onset of strong recovery in the oil & gas sector, which is not really the case here. The Odessa Economic Index will likely continue to contract for the coming few months, and may begin to turn around by late 2016 or early 2017 depending on the nature and strength of the stimulus provided by expanded oil & gas activity.
For now, though, the OEI table of economic indicators continues to register deep year-over-year declines in general spending, auto spending, hotel/motel activity, airport passenger boardings, and construction (both total construction and single-family home building). Existing home sales were higher for the month, though the price was sharply lower compared to a high average price in August of a year ago.
According to current employment estimates, Odessa payroll employment – simply the estimated number of jobs in the Odessa metro area – remains down by about 2% in August compared to August of a year ago, which in turn was down by 6-7% compared to August of the prior year. General real (inflation-adjusted) spending remains down by over 20% year-over-year, and real auto spending is down by 20% year-over-year as well (and down by nearly 15% in August).
Existing home sales spiked upward in August, with the number of closed sales up by 38% compared to August of a year ago. Sales over the last two years had fallen significantly - home sales in August 2014 and August 2015 were down by 15% and 17%, respectively compared to August of the prior year. The August 2016 monthly average price was down by 18% compared to August of a year ago; however, the August 2015 monthly average sale price was up by over 14% compared to August of the prior year. Thus far in 2016, the average home sale price is down by 4.1% compared to the first eight months of a year ago.
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