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Leading edge of Midland-Odessa economy turns higher

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Written by: Mella McEwen at mrt.com

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It was a mere tenth of a point, but the Texas Permian Basin Petroleum Index rose in August, ending 20 months of decline as oil prices sank to 13-month lows.

Karr Ingham, the Amarillo economist who prepares the index alongside the Midland-Odessa Regional Economic Index, had predicted a turnaround, but not for another couple of months.

Even though the move was very slight, “whether or not it’s the real deal in terms of representing a true turning point, it’s the next in the line of events” that will signal a recovery in both the area’s oil and gas economy and its overall economy, Ingham said.

“If it holds, and I suspect it will, it represents a turnaround in oil and gas activity and the general economy will do the same in the coming months,” he said.

The rise marks a milestone in a succession of events that has been “a longer, more tortuous affair than people had hoped entering into this cycle. Things are just slow,” he said.

Meanwhile, the Midland-Odessa Regional Economic Index, prepared for the Midland Development Corp., remained 12.2 percent below August 2015 levels. The index has fallen 18 percent from its peak reached in January 2015, which ended a period of expansion that saw the Midland-Odessa economy grow 70 percent between February 2010 and January 2015.

Consumer spending continued to decline, falling 20.8 percent compared to last August and down 20.9 percent so far this year compared to last year. Ingham noted that last year’s figures were also down 20 percent. In Midland, sales were down 19.6 percent and are down 20.3 percent so far this year.

After months of sharp drops, the decline in automotive spending slowed, down 1.3 percent in August from last August but down 17.5 percent so far this year. In Midland, however, automotive spending surged 13.2 percent compared to last August but is down 13.3 percent for the year.

Like automotive spending, construction activity was mixed between Midland and the Midland-Odessa figures. The valuation of building permits for Midland-Odessa was down 12.1 percent in August from last year and is down 30.6 percent so far this year. In Midland, however, building permit valuations climbed 37.1 percent over August 2015 figures, though they are down 38.7 percent so far this year.

There were more new houses under construction in August, with Midland and Odessa issuing 111 new housing permits, up 23.3 percent from 90 last August. Midland issued 85 permits, up 102.4 percent from 42 last August. Year-to-date, the two cities have issued 705 permits, down 14.5 percent from 825 last year. In Midland, 417 permits have been issued, down 18.9 percent from 514 last year.

There were more existing home sales in August, 336 compared to 294 last August, a 14.3 percent gain. Midland reported a 3.5 percent gain, 208 houses sold compared to 201 last August. Housing sales for the year, however, remain slightly lower than year-ago levels, with 2,147 homes sold in Midland-Odessa, down 1.9 percent, and 1,396 in Midland alone, down 2 percent.

For only the second time, the average sales price of a Midland home topped $300,000. The August average of $302,393 was 17.4 percent higher than last August’s average of $257,629. The Midland-Odessa average of $254,900 was 4.1 percent higher than last year’s $244,773.

“At one point in 2014, Midland’s average topped $334,000 so this is only the second time the housing price has topped $300,000, and in the midst of a sharp downturn,” Ingham said.

While he is confident the leading edge of the Midland-Odessa economy has stabilized and is ready to turn upward, Ingham cautioned there are some unknowns that could send the economy back into contraction.

First is employment, he said. While the rate of job loss has narrowed to 1 percent, Ingham said that happened faster than he would have expected. It is possible that data revisions expected in early 2017 could “turn all of this on its head” and indicate job loss was worse than expected, he said.

Crude oil price levels will be the dominant factor in deciding the economy’s direction, he said. The August average of $41.49 was 4.6 percent higher than last August’s average of $39.67 a barrel. But Ingham said that prices, while rebounding from February’s 13-year low of about $26 a barrel, have remained relatively flat over the last several months.

Those flat prices mean that the Permian Basin rig count, which had risen in response to higher prices, will likely stall in coming weeks, barring an upward price movement, Ingham said.

Prices have just topped $50 a barrel for the first time since June on talk Saudi Arabia and other members of the Organization of Petroleum Exporting Countries have agreed to production cuts that could be formalized in November. Whether those cuts actually take place remains to be seen, he said.

More important than action by Saudi Arabia and OPEC is action taken by the U.S., he said.

“U.S. production is on the decline — we were a game changer,” he said. “We have to be instrumental in cutting output to push up prices, and we will be.”

Now both U.S. and Texas production levels are falling and Permian Basin output, while still rising, will follow suit, he said. August oil production volumes from the West Texas portion of the Permian were 3.1 percent higher than year-ago levels, but that is a quarter of the 12 percent increases seen when oil prices were $100 a barrel.

Ingham stressed that this recovery will be different from the last downturn, when prices sank below $40 in 2009 as the economic recession took hold, quickly rebounding the next year. He said this recovery will be more subdued without triple-digit oil prices and a rig count near 2,000.

Written by: Mella McEwen at mrt.com

Click HERE to Read Article From Publisher