Dallas Fed survey: Energy activity surges, but natural gas growth remains measured

Business activity in the U.S. oil and gas sector accelerated sharply during the second quarter, driven by stronger capital spending, improved oilfield service margins and higher commodity prices, according to the latest Dallas Federal Reserve Energy Survey. However, natural gas production growth remained modest despite growing optimism tied to LNG exports and long-term demand expectations.

The survey’s business activity index climbed from 21.0 in the first quarter to 46.1 in the second quarter, its highest level since mid-2022. The increase came as energy companies navigated heightened geopolitical tensions surrounding Iran and the Strait of Hormuz while benefiting from stronger cash flow and improving market conditions.

Despite the stronger business environment, natural gas production showed little change. The natural gas production index registered 3.7 in the second quarter, essentially unchanged from the prior quarter, while oil production posted more meaningful gains.

Several producers pointed to LNG exports as a key long-term support for the gas market. One respondent noted that “the increase in liquefied natural gas exports is helping tremendously,” even as producers continue to face commodity price volatility and geopolitical uncertainty.

Capital spending increased significantly during the quarter. The capital expenditures index rose from 21.2 to 40.9, with nearly half of survey participants reporting increased spending. At the same time, firms remained cautious about longer-term investment plans, with the expected capital expenditures index for next year remaining neutral.

For companies involved in natural gas compression, gathering and processing infrastructure, one of the most notable findings was the return of cost inflation across the supply chain.

Among oilfield service companies, the input cost index jumped from 34.9 to 64.4, while supplier delivery times lengthened considerably. More than one-third of respondents reported longer lead times for equipment and materials, suggesting that supply chain constraints continue to affect field operations despite broader improvements in business conditions.

Service companies also reported tightening equipment availability and labor markets. Several respondents said rental tools and field services were becoming increasingly difficult to secure, while competition for experienced crews intensified as activity increased across the Permian Basin.

“The increased cash flow means more drilling,” one producer commented, while another noted that service providers are once again gaining pricing power amid higher activity levels.

The survey also highlighted the widening gap between conditions experienced by producers and service companies. Exploration and production firms reported a positive outlook index of 48.2, while oilfield service firms remained cautious, posting an outlook reading of negative 4.4 despite improving margins and utilization rates.

Respondents expect Henry Hub natural gas prices to average $3.36/MMBtu by year-end 2026, rising to $3.75/MMBtu within two years and $4.14/MMBtu over a five-year horizon. Those expectations suggest industry participants remain constructive on long-term gas demand, particularly as additional LNG export capacity comes online.

For the midstream sector, the survey points to a market characterized by steady natural gas growth rather than a rapid production surge. While producers remain cautious about committing to large increases in future spending, stronger cash flow, expanding LNG demand and tightening service markets continue to support investment across the natural gas value chain.