Micro to Macro - The Dallas Fed Energy Survey

The Gist: (1) The latest Dallas Fed Energy Survey shows that the cost to replace a barrel of oil reserve (F&D) continues to rise. (2) In the long run, F&D drives oil prices via cost-push inflation. (3) Survey data indicates that the O&G labor market is continuing to soften, which will impact U.S. production in 2025.

The Dallas Fed Energy Survey is released quarterly and serves as the closest equivalent in the oil and gas sector to the ISM manufacturing survey.

I enjoy publishing on this topic because:

1. It is the only source of data providing an intra-year view of how operators perceive finding and development (F&D) costs to be trending at the margin. These trends, in turn, drive prices over the medium to long term—the period I care about most.

2. It offers insights into the O&G labor markets which in turn drive production growth, typically a month or two ahead of the official BLS data.

Let’s dive in.

The latest survey data showed that F&D costs continue to rise quarter over quarter, albeit at a slower pace.

This is important because, in my view, proved developed (PD) F&D costs provide the floor for oil prices. If the floor is rising, as has been the case over the last few years, oil prices have upward support.

The survey data includes operators in the Permian which has been ground zero for lowering PD F&D from 2014-2020.

When the 10ks come out I will update these charts with the reserve disclosure data but for now, the Dallas Fed Survey is hinting at continued increases albeit at a more moderate pace.

Stepping back and taking a look at the big picture, if development costs are rising it would imply that well productivity in the non-OPEC world is continuing to slow, which has been my view.