Dallas Fed: 3 predictions for oil prices and production in 2022

Recently, the Dallas Fed released the results of its fourth-quarter energy survey, which included data
from 90 exploration and production companies and 40 oil service companies collected between December 8 and 16.
Here are some insights from the survey and their implications
for future U.
S.
oil production and oil prices.

1.
Production costs skyrocket

This is the third consecutive quarter of rising production costs
.
However, it is worth noting that the growth rate in the fourth quarter was the fastest
in the five years since the survey was conducted.

Costs including exploration and development, lease operating expenses and personnel rose
across the board, the report said.
In fact, the main thrust of the commentary section is rising costs, with executives expecting production supply difficulties and inflation to affect drilling and completions in 2022
.
Executives also cited labor shortages and difficulty finding qualified employees as a factor
limiting production.

Inflation is clearly a reason for the rising cost of oil production, and these costs are likely to be passed on to consumers
.
Even if spending doesn't continue to increase, they are likely to remain high and will help maintain the bottom line
in oil prices.
In addition, rising costs may also dampen production growth
in 2022.

2.
Price expectations are slightly higher

132 senior executives provided forecasts
for WTI prices at the end of 2022.
The average forecast price is $
74.
69 per barrel.
74% of respondents believe that WTI prices will be in the $70-$85 range by the
end of 2022.

However, the company reports that when planning capital expenditures for 2022, their plan is based on the WTI average price of just $64/b
.
These price predictions are less optimistic than many big banks such as Goldman Sachs, Citibank and Morgan Stanley, which predict oil prices will rise to the $80 to $90 range in 2022
.

It is important
to understand these price predictions in the proper context.
The recent trend is that investment banks overvalue oil prices, while U.
S.
oil companies tend to underestimate them
.
For example, in the third quarter (in the survey conducted from September 15 to 23, 2021, the spot price was around $72/barrel), respondents put the average price of WTI at the end of 2021 at $69.
99/barrel
.

In fact, the price of WTI on December 30 last year was $76.
99/barrel
.
On the other hand, in October, many big banks believed that the price of Brent crude oil would reach $
90 per barrel in December 2021.
Obviously, this is not the case, and these banks are overly optimistic
.

Oil companies, especially those in the United States, may tend to underestimate future prices because their recent experience is one of an extremely low price
.
The prolonged period of low prices that began in 2015 hit many companies hard, especially by the total collapse of WTI in the spring of 2020
.

Therefore, given the possibility of lower oil prices in 2022, companies may be extra conservative and underinvest
in capital expenditures.

3.
Production growth is a top priority, especially for small companies

Despite rising costs, labor shortages, regulatory uncertainty, and lack of funding from financial institutions, nearly 50% of businesses ranked production growth as a top priority
in 2022.
However, this does not mean that investors will necessarily see a significant increase
in total US production in 2022.

Small businesses (defined in the survey as producing less than 10,000 barrels per day) overwhelmingly listed production growth as their main target, while large companies (defined as more than 10,000 barrels per day) were more likely to list debt reduction as a top priority
in 2022.
Because these companies are so small, even if they double their capacity in 2022, their production is unlikely to have a significant impact
on overall U.
S.
production in 2022.