The Federal Reserve Bank of Dallas announced this week that the oil and gas industry remained strong in the third quarter of 2018. The good news came amid pipeline capacity concerns in the Permian Basin.

In this quarterly report, the Dallas Fed surveyed 171 energy companies, of which 110 respondents were executives at exploration and production (E&P) firms. The remaining 61 came from oilfield services businesses.

The bank’s business activity index — an indicator of conditions for its oil and gas entities — inched down from 44.5 points in the second quarter to 43.3 points in the third quarter, which ended on September 30. Still, business activity remained near the highest level since this energy survey began in 2016.

E&P firms experienced growth, reflecting 41.8 points on the business activity index, up from 37.2 points last quarter. Oilfield services companies fell from 54.2 to 45.9 points.

According to E&P executives, oil and gas production increased for the eighth consecutive quarter. Still, the oil production index fell from 39.0 in the second quarter to 34.8 points, indicating crude oil production rose at a slightly slower pace. The natural gas production index rose from 33.4 to 35.5, a survey record high.

For oilfield services firms, the survey highlighted that the equipment utilization index increased by three points from the second quarter to reflect 44.8 points, but input costs jumped from 36.3 to 46.6. The index of prices received for oilfield services remained at 23.3, suggesting prices increased at the same pace as in the previous quarter.

The labor market indexes pointed to continued growth in employment and work hours during the third quarter; however, the rate of growth slowed mainly for oilfield services. Jobs dropped from 44.1 to 31.7 points. Working hours also fell from 50.8 to 41.0 points.

E&P firms saw continued growth in jobs and work hours during this quarter. The employment index increased from 11.6 to 17.4 points, the highest since the Dallas Fed began collecting survey data. The report described the aggregate wages and benefits index as “positive,” although it slipped from 27.9 to 23.5 points.

Uncertainty played a role in this survey. Overall, the uncertainty outlook index rose to 8.8, up from 1.5 in the previous report. This increase largely reflected oilfield services companies where this index hit 14.7, up from 6.8 in the second quarter. E&P respondents saw a rosier future with an uncertainty outlook index at 5.5 points, slightly up from 2.7 in the last survey.

The report also focused on industry concerns that lead to uncertainty such as pipeline capacity constraints in the Permian Basin. The shale play located in West Texas and southeastern New Mexico is a major force among the world’s oil producers. In June, experts forecasted the region would double production by 2023 and supply more than 60 percent of the world’s oil. Already, Permian Basin oil production exceeded pipeline capacity, making it difficult to move the output to market and creating a slowdown. Costly pipeline projects are under construction or planned for the next few years. Nonetheless, 56 percent of survey respondents believed crude oil pipeline constraints would be alleviated by the end of 2019. The remaining 44 percent believed this relief would come in 2020 or even later.

Another concern was price differentials. Seventy percent of respondents believed crude oil price differentials between WTI in Midland, Texas, and Cushing, Oklahoma, would have a slightly negative impact on oil production growth in the Permian Basin over the next six months. Only 17 percent envisioned significant impacts and 12 percent foresaw no impact.

Survey participants expected West Texas Intermediate (WTI) crude oil to sell for an average of $68.81 a barrel by the end of 2018. They anticipated Louisiana’s Henry Hub pricing for natural gas to average $2.94 million per million British thermal units (BTU) by year’s end.

Of the respondents who answered a question on global oil supplies, 64 percent thought the market would be close to balance in 2019, although 26 percent said it would be undersupplied. The remaining 10 percent suspected it would be oversupplied.

The survey also asked participants what impact steel import tariffs (25 percent) has had on their businesses so far. Fifty-two percent said it had a slightly negative impact; 33 percent noted no impact; and 15 percent said the tariffs had a significantly negative impact.

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