Oil Markets Miss the Brass Ring: Another Slow Year for Houston in Robert W. Gilmer, Ph.D. C.T. Bauer College of Business November 12, 2015

Transcription

1 Oil Markets Miss the Brass Ring: Another Slow Year for Houston in 2016 Robert W. Gilmer, Ph.D. C.T. Bauer College of Business November 12, 2015

2 $120 $100 $104 It Is All About Oil! Price Is Now Down By Over Half Spot Price of WTI in $/barrel $80 $60 $40 $59 $51 $54 $ $20 Jul Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec*

3 Running Out of Good Options: Five Past and Present Scenarios Fracking Forever! -- Summer 2014 Maybe It Won t Be So Bad? -- Early 2015 V-Shaped Recovery Summer 2015 & now off the table U-Shaped Recovery 2016 Check-Mark Recovery Current favorite of big investment houses Fracking Defeated Slow and partial recovery of rig count from current levels of drilling

4 How Is Houston Doing in 2015? Very Slow, But No Recession So Far December 14 to November 15 Annualized Jobs Percent Change Jobs Percent Change Not Seasonally Adjusted 13, % 15, % Seasonally Adjusted -- Workforce Commission 15, % 17, % -- FR Bank-Dallas 3, % 3, %

5 Job Losses Or Gains By Sector: If Houston Finishes the Year the Way It Started (000 Dallas Fed Estimates, s.a.) Sector Number of New Jobs 2015 Percent Change Total Payroll 3, % Mining --10, Construction 10, Manufacturing -19, Wholesale Trade -2, Transportation and Utilities -2, Information Banking, Finance, and Real Estate Professional and Business Services -13, Education and Health 14, Leisure 11, Other Services -1, Government 8,

6 Houston Employment: Year-to-Date Job Growth Near Zero Note: December to December changes, except 2015 which is year-to-date, annualized and seasonally adjusted by Texas Workforce Commission

7 Jan-07 Jun Nov Apr Sep Feb Jul Dec may oct mar aug 12-Jan june nov apr sept feb july dec may oct 6 4 Houston s Job Growth Machine Broke Down in Early 2015 (3-month percent change at annual rates) Houston U.S Texas Workforce Commission and Bureau of Labor Statistics

8 Purchasing Managers Index U.S. and Houston Compared (s.a.) Index > 50 means expansion Index < 50 contraction Houston U.S.

9 Houston PMI: Detail Says Production Stabilizing, Employment Still Falling (s.a.) Employment Production

10 Houston Unemployment Rate Is Now Rising (percent unemployed, s.a.) U.S. Houston

11 This Is Not a Video Game: Economic Events Unfold Over Months and Years Drilling, oil producers, oil services, machinery, and fabricated metals have taken a big hit already But many sectors still holding up very well construction, education, health care, retail, single-family housing, apartments How can this be? Many local companies ties to a still-strong U.S. economy. Or getting help from the east side petrochemical expansion After a decade of strong growth, there is still a need to catch up with infrastructure, housing, etc. Population growth often continues for several quarters after the employment growth comes to an end, giving a boost to some sectors The pain of the oil downturn will spread much more widely through Houston s economy in 2016 if oil remains weak. The catch-up phase in housing and infrastructure is ending, population growth will finally slow, and weakness in oil will be fully exposed.

12 Oil Markets and Oil Price

13 Factors Weighing on World Oil Markets Supply Issues The Saudis and other OPEC members continue to produce all out, reinforcing Saudi determination to push Texas and North Dakota fracking into the role of swing producer Turmoil in the Middle East keep countries like Libya, Syria, and Iraq producing full out to fight insurgencies Iran is increasingly certain to rejoin world oil markets bringing large quantities of oil and oil products to market immediately from floating storage. Contracts are already being let to rehabilitate aging infrastructure so it can expand exports U.S. oil production remains stubbornly high, as do U.S. commercial inventories Demand Issues The fall is seasonally weak, as refineries undergo maintenance and gear up for winter IMF and others revise down the outlook for global growth. Europe and Japan show signs of a return to growth, but their outlook us still sluggish The dominant issue in recent weeks has been the slowdown in China and emerging markets. Is the commodity super-cycle really over?

14 Global Growth Sluggish in (% GDP Growth) World U.S Europe Japan China India Brazil Source: IMF World Economic Outlook: October, 2015

15 Days of Chinese Double-Digit Growth Are Behind Them Percent change in real GDP IMF history and forecast, October 2015

16 Growth in the Demand for Oil Comes From Emerging Markets (million b/d) Global OECD Non-OECD International Energy Agency

17 Is the Commodity SuperCycle Over? (price index: Jan 2001 = 100) Food Ag Raw Materials Metals Crude Oil 0

18 Dr. Copper Says Slower Global Growth Is Sucking Air Out of the Commodity Bubble (price index: Jan 2001 = 100) Source: Bureau of Labor Statistics, Producer Price Index, Copper and copper products

19 On Supply Side? U.S. Shale Reversed 40 Years of Declining Oil Production (million barrels/day) DOE/EIA, Seasonally adjusted by IRF

20 U.S. Shale Is a High-Cost Source of Oil: $100/Barrel Was Part of the Magic Seadrill, Ltd. Prices currently lower as services costs decline

21 The Saudi Revenue Dilemma Raise price/lose market share OR cut price/keep market share The low oil prices work on many levels for the Saudis Help their friends in the U.S. and Europe Punish OPEC cheaters, adversaries and enemies: Isis, Iran, Iraq, Venezuela, Russia Force U.S. shale into the role of the swing producer Have deep pockets for this venture with $800 billion and more in sovereign fund The Economist, December 2014

22 Working Rigs in Saudi Arabia: Excess Capacity as a Deterrent? 130 Number of Working Rigs Baker Hughes

23 Hard to Make an Optimistic Case for Oil in Coming Few months We will see domestic oil production fall below the 2014Q4 production levels by late 2015? So far, US production growth is slower but not declining yet Producers have learned a lesson, and won t jump back in out-spending cash flow again? They have retreated to sweet spots, are taking advantage of depressed service costs, and have left a large overhang of drilled but uncompleted wells Recent data are pointing to better demand for oil, especially in Europe and emerging markets? Global demand is surprisingly strong. The problems are on the supply side Lower for Longer is the current mantra of oil analysts at investment houses like Goldman Sachs and Raymond James

24 Thousands Is U.S. Oil Production Finally Slowing? Thousand bbls/month, s.a. data Seasonally adjusted by IRF using Census X12

25 550 U.S. Commercial Oil Storage Now Declining? (millions of barrels) Week Data is NOT seasonally adjusted

26 What the Future s Market Thinks About Where WTI Oil Price Is Headed $75 WTI, Price $/Barrel $65 $55 $45 $35 $37 $41 $44 $46 $48 $50 $51 $52 $54 $25 Feb-16 Sep-16 Apr-17 Nov-17 Jun-18 Jan-19 Aug-19 Mar-20 Oct-20 As of Dec 31, 2015 Futures $65

27 WTI Price: Historical and Futures Price In December 2015 ($/Barrel) 95% certainty Energy Information Administration, Short-term Energy Outlook, December 2015

28 WTI Price: Historical and Future s Price in September 2014 ($/Barrel) 95% certainty Source: Energy Information Administration, October 2015

29 The Greatest Oil Boom Is Over for Now Drilling capital expenditures ($2014 billion at annual rates) Baker Hughes rig count (working rigs)

30 Drilling Takes Another Leg Down: The U-Shaped Recovery Is Here Weekly Count of Working Rigs Weeks after peak in drilling activity

31 Local Job Losses Will Spread If Drilling Does Not Turn Up

32 Basic Jobs Try to Stabilize Over the Summer 15 (3-mo percent change at annual rate) Basic Non-Basic

33 Define the Houston Base This Way: Divide into Energy/Not Energy Base Energy Not Energy Oil and Gas Extraction X X O Producers X X O Services X X O Construction O O O Manufacturing X O O Fab Metal X X O Machinery X X O Computer Eqpt X O X Refining X X O Chemicals X X O Other manufacturing X O X Wholesale Trade (EX) X O X Air Transportation (EX) X O X Pipelines (EX) X X O Prof/Business Services (EX) X O X X = Included O = Not included EX = measured as excess employment

34 Energy Jobs Lead Houston s Growth Over the Past Decade (000 workers) non-energy base energy base

35 Machinery and Fabricated Metal Jobs in Houston Closely Tied to Energy (000 workers) Fab Metals Machinery

36 Professional and Business Services: 450,000 White Collar Houston Jobs Professional, scientific, and technical Legal Accounting Architects Consultants Computer system design Engineering Regional and National Headquarters Administration and Support Services

37 Professional and Business Services: Highly Cyclical White-Collar Jobs (6-mo growth rate) Professional services grow faster in good times 5 0 Total empl Prof Serv empl Professional services shrink faster in tough times

38 About Four Non-Basic Jobs in Houston Supported By Each Base Job

39 Four Scenarios

40 Three Scenarios for Houston s Economy: It is All About Oil A V-shaped recovery that begins in early 2016, with drilling and the rig count expanding as fast as in the recovery of This scenario is now pretty much behind us. A U-shaped recovery, similar to the V shape, except delayed until mid The rig count returns to 1800 rigs, and recovery once it begins is at the same rate as the drilling recovery. Once recovery is complete, energy jobs in Houston grow at 1.8 percent annually, a rate typical of the early phases of the fracking boom. A check-mark recovery, with the rig count flat through 2016, and then growing slowly through The rig count returns to levels near 1800 only by late Energy jobs return cyclically and with the rig count, and they return to 2014 levels only in 2018Q4 Saudi s win! Fracking is damaged seriously by sustained low oil prices, the rig count is only 1300 by the end of 2019, and energy employment does not return to 2014 levels before

41 Domestic Rig Count Guides the Recovery of the Oil Sector 2,000 Number of Working Rigs 1,800 1,600 1,400 1,200 1, U-shaped Check Mark Damaged

42 Contraction and Recovery of Upstream Energy Jobs to 2019 Under Four Scenarios Percentage Growth Q/Q 2.00% 1.50% 1.00% 0.50% 0.00% -0.50% -1.00% -1.50% -2.00% -2.50% -3.00% U-shaped Check Mark Damaged

43 U.S. Economy Continues to Grow Strongly and Create Jobs Assume in all scenarios that the U.S. economy has put the Great Recession behind it Consumer has deleveraged; state and local governments are collecting revenues at a healthy rate and spending; the housing market has returned to close to normal U.S. job growth is at 1.7 percent or about 200,000 jobs per month throughout the forecast horizon Current strength of the dollar and struggling global economy make this seem optimistic right now but current events count for little over a 4-year horizon

44 For All Scenarios, the Result of Drilling Downturn Would Be a Mild Recession in Houston 8.00% Payroll Jobs: Quarterly % change at annual rates 6.00% 4.00% 2001 Recession/Enron 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% Asian Financial Crisis U.S. Financial Crisis Fracking Bust U-shaped Check Mark Damaged

45 Downstream Boom Offsets Upstream Bust

46

47 30 Low Oil Prices Keep Gulf Coast Refining Margins Strong ($/bbl) margin Six-mo avg 5 0 Pace refining margins, Oil and Gas Journal

48 Natural Gas Production Shares Oil s Hockey Stick Surge Marketed production, Bcf/mo, seasonal adj

49 Natural gas prices collapsed in late 2011 ($/mcf) Jan-1997 Nov-2000 Sep-2004 Jul-2008 May-2012 DOE/EIA

50 $153 Billion U.S. Construction Boom is Based on Cheap Energy and Exports This $153 total includes many industries and all of the U.S. New ethylene crackers, more ethylene-related expansion in PE, PVC and other derivative plants LNG export terminals to sell surplus natural gas into global markets Refiners have joined in with additional expansions Note: The $153 billion figure is based on all shale-related expansion, estimated by the American Chemistry Council in October, 2015

51 Natural Gas Energy Content Equivalent to $20-$40 per Barrel for Oil oil $/b nat gas $/b Jan-01 Jul-03 Jan-06 Jul-08 Jan-11 Jul-13 DOE/EIA and calculations of the author

52 70.00 Ethylene Margins (cents per pound)

53 Large Projects Headline Over $50 Billion in East Houston Construction Company Location Project Completion Value ($ mil) Exxon Baytown Ethylene 2017 $5,000 Chevron Freeport Ethylene 2017 $4,000 Dow Baytown Ethylene 2017 $3,500 BASF Freeport Ethylene 2017 $3,000 Freeport LNG Freeport LNG Export 2019 $3,000 Freeport LNG Freeport LNG Export 2020 $3,000 Bayer Baytown PUR Facility 2021 $2,000 CPV Freeport Gas to Polypropylene 2017 $1,500 Freeport LNG Freeport Methane to Propylene 2018 $1,400

54 Petrochem and LNG Still Dominate Figures $ million Chemicals/Plastics $32,790 Liquified Nat Gas Refining Natural Gas Processing Pipelines and Terminals Misc $6,800 $4,743 $3,375 $2,655 $650 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000

55 Projects Begin to Wind Down Rapidly After 2017 (Value of Projects Completed, $ million) $25,000 $22,706 $20,000 $15,000 $10,000 $8,319 $5,000 $4,980 $4,000 $3,000 $2,000 $

56 A Counterweight to Upstream Damage From Low Oil Prices Jobs adds up quickly given the number and scale of proposed construction projects in These are temporary jobs, disappearing as projects end and capital expenditures wind down Normally, downstream capital expenditures are small compared to the upstream, move in a narrow range, and create relatively few jobs The construction projects just described means the downstream can t be ignored right now. Can this spending substitute for losses upstream?

57 Temporary Jobs, Temporary Workers Does one construction job equal one lost in drilling? In professional and business services? Compensation is good for the skilled, unionized jobs BUT we are replacing long-term employment with temporary construction jobs These jobs will be important in keeping machine shops and industrial base for machinery and fabricated metal busy But they won t need high-end apartments, luxury retail, office space, or other amenities? Industrial east side booms while the air could be sucked out of the whitecollar west side. There is plenty of scope for economic disruption, even if overall job numbers stay healthy Assume multipliers for the construction workers are half of the white-collar jobs they replace

58 Energy Employment: East Side Construction Workers Treated as Temporary Part of the Economic Base Thousand Energy Workers U-shaped Check Mark Damaged

59 Allow for the Petrochemical Expansion: Houston Skirts Recession 8.00% 6.00% 4.00% Payroll Jobs: Quarterly% change at annual rates 2001 Recession/Enron 2.00% 0.00% -2.00% -4.00% Asian Financial Crisis Fracking Bust -6.00% -8.00% U.S. Financial Crisis U-shaped Check Damaged

60 Job Growth in Houston, (000 Jobs, Q4/Q4) Scenario Year U-Shape Check Mark Damage 40/40/ ,

61 Population Growth

62 Population Change in Houston, ,000 Natural Increase = Births Deaths Net Migration = Population Change Natural Increase 100,000 50, , ,000 Natural Increase Net Migration

63 Houston s Net Migration Is a Result of Past Job Growth Rule of Thumb: Net Migration =.50*Last Year s Net Migration +.45*Last Year s Job Growth Job Growth Leads and Migration Follows Net Migration = 100, Job Growth = 100, Net Migration = 95, Job Growth = Net Migration = 47, Net Migration Payroll Growth

64 Population Growth in Four Scenarios U-Shaped Check Mark Damage 40/40/20 Net Migration (000) Population Growth (000) Population Growth (%) % 2.5% 2.5% 2.5% % 2.1% 2.1% 2.1% % 1.6% 1.6% 1.6% % 2.0% 1.7% 1.9% % 2.2% 2.1% 2.2% Note: Since 1970 population growth in Houston has averaged 2.4 percent per year, net migration 4.7 percent

65 Quarterly Data Shows Slow Population Growth Decline And Slow Pick-Up Net Migration By Quarter 30,000 25,000 20,000 15,000 10,000 5,000 0 Interpolated By Employment Peak and Trough By Scenario Peak in-migration came in 2014Q3, with slow decline in growth through 2015 Population growth begins to accelerate again: V-Shape in 2017Q21 U-Shape 2017Q3 Check-Mark in 2017Q3 Damage 2017Q4 Turn around in growth comes more slowly than employment U-Shape Check Shape Damaged Note: Annual net migration interpolated to quarterly figures using least squares and employment as an indicator variable.

66 Residential Real Estate

67 Existing Home Sales Flat in Houston Since 2012 (sales, s.a.) Flat since 2012? Due to lack of existing and new home supply Median home prices rose rapidly after 2011, at 9.4 percent annually from saw continued high level of sales, limited relief on inventories, prices level off since the spring

68 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 Jan-08 Dec-08 Nov-09 Oct-10 Sep-11 Aug-12 Jul-13 Jun-14 May-15 Thousands Lot Shortages Distort Single-Family Housing Market Months Supply Median Price Source: Texas A&M Real Estate Center

69 Single-family Permits in Houston Still Lag History Monthly permits, s.a. Permits s.a. 6-mo average

70 2500 Still Permitting Multi-Family As if Job Growth Will be Strong (units per month) permits 6-mo average

71 In Closing This is a serious downturn in oil markets, that has run faster and deeper than , and it has serious implications for Houston The options for a quick and easy way out of this downturn have disappeared, and slow job growth will likely stretch through 2016 With limited job growth in 2016, many sectors that seemed immune to the slowdown in 2015 will begin to feel it. Health care, leisure, retail, single-family, and multi-family will be on this list That said, it is another oil downturn in Houston. It is not 1982 or maybe for oil markets, but not the Houston economy

72 Another Slow Year in 2016 as Oil Prices Find New Lows Robert W. Gilmer, Ph.D. C.T. Bauer College of Business November 12, 2015