The OCTG ‘Space’ 1Q19: The Current Frontier

Photo Courtesy CTAP, LLC - The OCTG Situation Report April 2019

Photo Courtesy CTAP, LLC

Susan Murphy | The OCTG Situation Report

Susan Murphy | Publisher + Editor-in-Chief

While visual evidence of a massive Black Hole made headlines recently, we’re happy to report you won’t find any black holes in OCTG inventory metrics due to our exclusive quarterly Inventory Yard Surveys. This breakthrough is credited to our publication’s founder, Duane Murphy, who decided 33 years ago it was high time to resolve this gap and went about the laborious task of doing exactly that. The gravity of his work cannot be underestimated especially when you consider our inventory results are not the product of guesstimates like all others. To that end our computer model cranks out data points collected from over a hundred pipe yards throughout the supply chain that help us provide accurate and essential insight into the metrics that matter.

Our 1Q19 yard probe of the US supply chain revealed that “prime” OCTG inventories in the lower 48 expanded in the period ending 3/31/19. The bulk of increases were reported in the mill/processor segment; concentrated mainly in the processor category. Much of what we witnessed with regard to the increases can be ascribed to the reset in import quotas, not to mention the decline in WTI crude prices that surprised to the downside in 4Q18 about the time 2019 budgets were being considered. Reasonable hikes, by most measures, were recorded in all but two categories throughout the tri-state (TX, OK, LA). No surprise many processors cited a pickup in inbound activity; much of it imported goods. Greater detail and analysis on our recent survey and other contiguous data points can be found in this month’s Report.

What do mounting inventories signal and what do they mean for key oil patch metrics like consumption and months of supply? More often than not inventory builds are unwelcome, which is why suppliers do what they can to keep them in check. Increases in inventory can be interpreted as a signal of weaker than anticipated demand (the bad) or demand that is expected to grow in the future (the good). May sound basic but there’s more. In addition to examining the raw size of product inventories, studying trends in months of supply (trickles down from inventory) offers clues to the health of the market at any given time. This metric illustrates how many months it would take for the current inventory of OCTG on the market to sell given the pace of sales. It also plays into whom the market favors. Lower inventory levels are more favorable to sellers and prices while higher inventories typically favor buyers looking for better deals. Thus, an understanding of inventory levels not only provides insight into product tightness and surpluses it is also indispensable to knowing when to time buys. 

So where is the market today and how does it bode for Q2 and beyond? Current inventory months of supply is slightly leveraged toward buyers. This metric has edged up over the past quarter but still remains in a relatively comfortable place provided the market doesn’t sour in Q2. Consumption for Q1, while hardly ‘over a barrel,’ did succumb to the downward forces on WTI in 4Q18. Imported shipments burst out of the gate in January and have vacillated ever since but are expected to strengthen as we move farther away from the crude price sucker punch in Q4. Many domestic mills, buoyed by an absence of raw material cost constraints, are reporting steady but plodding sales this quarter in anticipation of improving crude prices. This combination suggests another quarter of inventory expansion ahead, an event that shouldn’t be problematic provided consumption moves in lockstep. And although there is plenty of market skepticism in the oil patch segueing from Q2 to 2H we believe the integrated Permian oil “majors” hold the keys to OCTG consumption this year. 

Even with a more bullish outlook, there remains one nagging marplot and that is tubing. While it may sound like old news and hyperbole considering spot market prices for the category have been getting hammered, we still caution buyers of the potential to be sidelined if tubing supplies dwindle in the latter part of the year when completions activity reaches a zenith. With the analysis provided in our April market intel you’ll understand that it doesn’t take a rocket scientist to predict what might lie ahead. 

If the stars are in alignment 2H19 is likely to be “one small step” for OCTG consumption. While it’s not a giant leap, it’s not a mission impossible either. 

Photo Courtesy CTAP, LLC

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Posted in 2019 E&P Budgets, CAPEX, Crude Oil Prices, Department of Commerce, DUCs, E&P, E&P spending, Energy, ERW Pipe, First Quarter, Government Shutdown, HRC, OCTG, OCTG CAPEX, OCTG Consumption, OCTG Consumption & Pricing, OCTG domestic shipments, OCTG Exports, OCTG Imports, OCTG inventories, OCTG Inventory Survey, OCTG mill, OCTG Mills, OCTG Pricing, OCTG Processors, OCTG Producers, OCTG Spot Prices, OCTG Trade Case, Oil & Gas Industry, Oil & Gas Pricing, Oil Country Tublular Goods, Oil Patch, Oil Prices, Oil Services & Equipment, Onshore, Permian Basin, Prime Pipe, Q1, Seamless Pipe, Section 232, Shale, Shale Plays, steel industry, Steel Tarrifs, Steel Trade Case, Supply Chain, Trade Case, Tubular Goods, upstream OCTG, WTI prices | Tagged , , , , , , , , , , , , , , , , , , | Leave a comment

Will OCTG Buck 2018’s Advancements?  

Photo Courtesy Devon Energy

Photo Courtesy Devon Energy Corp.

Susan Murphy | The OCTG Situation Report

Susan Murphy | Publisher + Editor-in-Chief

H-Town confirmed it knows the ropes as it played host to a Texas-sized A-list this month for the RodeoHouston Livestock show and the 38th annual CERAWeek where revelry met with a “New World of Rivalries”; the theme for the preeminent confab. Meanwhile, we put our own unbridled energy into rounding up all the stats necessary to prepare our yearly “state of the industry” Report: a comprehensive review of the metrics that matter in OCTG for the past three years. Typically, this analysis would be provided in February but the government shutdown delayed the year-end import/export data points that are needed to tally the annual stats. 

Examining the year-end totals stacked side by side is always an enlightening exercise even though we live with the numbers daily. Two metrics that bode well for domestic OCTG health in the short-term are the drop in inventory tons and the improving domestic shipments outlook Y/Y spurred by the 232. Indeed, the Section 232 proved providential for most domestic OCTG suppliers by reining in imports for the first time in years: restoring balance and reducing import market share to the lowest point since 2014. Further underpinning the market, months of supply closed out December in a good place. This fact, in and of itself, could be viewed as a “Trojan Horse” if crude pricing rallied and operators responded in kind, but we won’t worry unless we see further compression in this metric when we complete our exclusive Quarterly OCTG Inventory Yard Survey next month.  

We’ve been riding herd on market dynamics for 1H19 for some time now, devoting ample space to our thoughts in last month’s Report, so we dove right in with our updated full year OCTG outlook for 2019 detailed in our March Report. Our projections were built in large part on WTI crude pricing for 2019 that are mostly in line with consensus forecasts, ranging between $55 – $60/bbl versus the average for 2018 of $64.94/bbl. The drop in commodity price that suggests a corresponding contraction in Capex budgets and thus a dampening in drilling activity and OCTG spends further informed our updated forecast this month. 

While this isn’t our first rodeo, forecasting OCTG spot market pricing for 2019 is fraught with difficulty due to the indeterminate issues discussed above. We’re somewhat less bullish now than when we approached this subject back in November. With imports surging back into the market, HRC prices averaging -15% under the 2018 average and suppliers aggressively defending their turf, prices are more apt to stagnate through June. The $64,000 question remains at what point does the ‘buck’ stop dropping? Will the OCTG distributor average reverse course if inventories continue to shrink? And what if crude prices surprise to the upside? The answer, friends, might just be blowin’ in the (Permian) wind. 

Should WTI break $60 in the last half of the year and stabilize thereabouts, OCTG demand will rise to the occasion but there are still limitations on how much it can grow at that point. One of the concerns we’ve voiced many times is tubing supply and while tubing counts for less in terms of weight/consumption, less can mean more—in terms of headaches—if it’s not readily available when needed. Case in point: tubing imports receded a fair amount in 2018 and there’s still no clear replacement for potential tubing deficits domestically until 2020. The kicker could be that South Korean mills will reduce their exports further if they’re hit with higher penalties as expected when the final determination to the third anti-dumping review is announced this April. And there’s still the possibility that Mexico and Canada will negotiate quotas in order to come to terms with the new free trade agreement (USMCA). Fresh negotiations on steel are still on tap for Japan as well. With a resolution to the Permian constraints (pipeline takeaway capacity among them) expected in 2H19, DUCs are expected to be drawn down and completions could soar. This means one thing as deduced from our discussion above; tubing prices will follow suit. Higher prices and limited quantities could temper completions/buys from those outside of the super majors and major Permian players and that could cause a hiccup in demand to close out the year. 

We know there’s a lot riding on our OCTG outlook and we’re also aware there are a lot of prognostications out there that are “all hat and few cattle.” While we can’t deny “it’s tough to make predictions—especially about the future,” we’re proud to offer the most accurate set of metrics and independent thought-leading research in order to arrive at conclusions on which our readers can rely. And that folks is no bull!

Photo Courtesy Devon Energy Corp.

Posted in CAPEX, CERAWeek, Crude Oil Prices, Department of Commerce, E&P, E&P spending, Energy, ERW Pipe, Government Shutdown, Inventory, OCTG, OCTG 2019 Forecast, OCTG CAPEX, OCTG Consumption, OCTG Consumption & Pricing, OCTG domestic shipments, OCTG Exports, OCTG Imports, OCTG inventories, OCTG Mills, OCTG Pricing, OCTG Processors, OCTG Producers, OCTG Spot Prices, OCTG Trade Case, Oil & Gas Industry, Oil & Gas Pricing, Oil Country Tublular Goods, Oil Patch, Oil Services & Equipment, Onshore, Permian Basin, Prime Pipe, Seamless Pipe, Section 232, steel industry, Steel Tarrifs, Steel Trade Case, Tubular Goods, upstream OCTG | Tagged , , , , , , , , , , , , , , , , | Leave a comment

Testing the OCTG Market’s ‘Metal’ in Early 2019

Anadarko November 2017 Cover

Photo Courtesy Anadarko Petroleum Corp.

Susan Murphy | The OCTG Situation Report

Susan Murphy Publisher + Editor-in-Chief

If it’s February it must be our “Annual State of the Industry Report.” But alas, that isn’t the ‘Situation’ this month as the shutdown got the better of anyone who relies on the government for stats. Thus, we’ve postponed our Annual Report until March when the December 2018 import/export data points will be made available, enabling us to provide a thorough examination of the trends that defined the OCTG landscape over the past three years. 

This month we’ll look at some current stats and try to make sense of the circumstances in which we find ourselves at present. Since crude oil pricing is the mother of all OCTG metrics we might as well start by acknowledging that it’s expected to impact a number of OCTG metrics at least for the first half of the year. The degree to which this will occur is all that’s in question. 

On the positive side of the ledger, according to the latest Dallas Federal Energy Survey, respondents believe a repeat of the last oil & gas industry downturn (2014) is unlikely this year so we can all breathe a collective sigh of relief. Executives from 161 oil & gas firms responded to the survey December 12 – 20 when oil prices were in the low 50s. The WTI crude price ended the week (2/22/19) at $57.26. Their report lent credence to what we’ve come to expect: as long as crude remains north of $50/bbl the “heavy hitters” (E&Ps drilling 10+ rigs in the highest returning plays) will more or less stay the course when it comes to budgets and drilling. Budgets from large independents will be flat until there’s greater clarity into commodity prices and rates of return while smaller operators with less capital and greater flexibility are likely to bob in an out of the oil patch as prices dictate. And although we can’t downplay the skittishness that hangs over any volatile oil market, 19 weeks after WTI dropped precipitously the rig count is only down -3%. That’s even as the number of private drillers historically sags in Q1 when they’re raising capital. This suggests a measure of resilience that some are interpreting as a shorter-lived correction. Just the same, with WTI hovering just above break-even prices for new wells (averaging $51 per the Dallas Fed Survey) caution will guide the market softer through 1H19 or until confidence in crude’s stability is restored. The silver lining in all of this may be that the Dallas Survey signaled, the potential for much slower growth in US crude production in 2019 relative to 2018.” Lower crude output, if met by the same from other countries, suggests higher prices for 2020 provided global demand for energy products remains intact. 

Meanwhile, OCTG pricing continued anemic in February. Buyers throughout the supply chain have their sights set on raw material costs for any signs of a better deal currently. And with inventory levels and months of supply in a good place, distributors are more likely to pounce if the price is right. The tepid OCTG pricing in February was driven by a steep decline in tubing prices. As long as DUC counts continue elevated, and especially if WTI dips below $50/bbl, tubing will take the hit. At this rate, there is little incentive for domestic OCTG producers to pick up the slack in tubing imports that is certain to grow throughout 2019. That could prove to be a real spoiler in 2H19 if crude prices tick higher and completion intensity increases. 

On the topic of imported OCTG, we predict imports will ease slightly in 2019. South Korean mills with the highest anti-dumping rates (to be finalized by the Department of Commerce in April), are the most likely to limit exports in 2019. Imports from Argentina and Brazil (under quota) will continue to be held in check although their shipments will not be subject to tariffs. With US substrate costs at more reasonable levels, domestic welded mills that are currently enjoying a little breathing room could see some import buyers turning in their favor, that is, if “capacity creep” (growing domestic capacity) doesn’t undercut recent improvements in margins.

While no one is expecting a sea change for 2019 most market participants are trying to find their sea legs. The jarring commodity price shakeup that took crude price whisperers by surprise last October set in motion what may end up being our “Altered State of the Industry Report” when we publish our Annual intel next year in February. Until then, watch this space for “all the news that’s fit to print.” 

Photo Courtesy Anadarko Petroleum Corp.

Posted in Crude Oil Prices, Department of Commerce, DUCs, E&P, E&P spending, Energy, ERW Pipe, Government Shutdown, Hot Rolled Coil, HRC, OCTG, OCTG Consumption, OCTG Consumption & Pricing, OCTG domestic shipments, OCTG Imports, OCTG mill, OCTG Mills, OCTG Pricing, OCTG Processors, OCTG Producers, OCTG Spot Prices, OCTG Trade Case, Oil & Gas Industry, Oil & Gas Pricing, Oil Country Tublular Goods, oil country tubular goods, Oil Patch, Oil Prices, Onshore, Pipe, Prime Pipe, Seamless Pipe, Section 232, Shale, Shale Plays, steel industry, Steel Tarrifs, Steel Trade Case, Supply Chain, Trade Case, Tubular Goods, upstream OCTG, WTI prices | Tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 2 Comments

4Q OCTG Inventory Yard Survey: Rolling with the Punches

photo courtesy centric pipe llc

Photo Courtesy Centric Pipe, LLC

Susan Murphy | The OCTG Situation Report

Susan Murphy | Publisher + Editor-in-Chief

The new year got underway with a blustery winter wallop: WTI prices struggling to reach $50/bbl coupled with a government ‘meltdown.’ We trust this isn’t the writing on the wall for 2019, so rather than wallow in woe we’ll kick things off with the results of our exclusive 4Q18 OCTG Inventory Yard Survey that may help some put a little spring in their step. 

Published every quarter, our OCTG Inventory Yard Survey is the only one of its kind in the world. It is designed to assess the health of the industry by measuring demand for OCTG throughout the entire supply chain (truck terminals, mills, processors & inspections yards) across 125 yards over the lower 48 (L48). 

Our 4Q18 yard survey of the US supply chain revealed that “prime” upstream OCTG inventories in the L48 contracted appreciably for the period ending 12/31/18. “Tri-state” (TX, OK, LA) OCTG inventories were cleared out considerably with the bulk of decreases seen in the mill/processor segment. OCTG inventories outside the tri-state region were tapered down as well in Q4. 

Much of what we witnessed with inventory turnover in Q4 can be attributed to the constriction in OCTG imports, not to mention the usual suspect—end of year inventory targets sought to reduce ad valorem taxes. While declines were recorded in every product category throughout the tri-state, ERW products were the most impacted this quarter. Welded OCTG inventories dropped a record-setting high with many (non-mill) participants citing slowing activity and a significant reduction in inbound activity versus outbound shipments. Coincidentally, those facilities that reported the largest drops in welded inventories this past quarter are those that routinely receive large amounts of imported OCTG. 

In a “typical” quarter we would use the results of our inventory survey to connect the dots—providing our subscribers with key oil patch metrics like consumption and months of supply. These are critical stats that are generated, in large part, by way of our quarterly surveys and are the very reason that accuracy in inventory matters. But these are anything but typical times. January 22 marked one month of an unprecedented government shutdown that rendered even the US census bureau MIA. And thus there are no data points available for what would have been their most recent release: November 2018 import and export stats. It’s enough to make one feel like banging their head against a wall! 

So how do the inventory stats sync up with all other metrics this quarter? What conclusion can be drawn by the whopping drop in welded stocks seen across the board—especially in facilities holding the highest volumes of imported goods? If we look at combined domestic and imported OCTG shipment stats for the second and third quarters (all that’s available for comparison at this juncture due in part to the government shutdown) we see steadily declining tons of welded shipments. We also can’t help but note the decided drop-off in overall imports in Q2 and Q3 and what will most certainly be the same for Q4. Moreover, imported ERW’s share of the import market YTD (through October 2018) contracted considerably. Thus, it’s no surprise that welded products would be thinning out heading into the year-end and that was confirmed by our survey. Carbon (a mainstay of imported shipments) inventories were pruned substantially over the quarter as were inventories of casing. Closely watched stocks of tubing (another imported mainstay) were reduced again in Q4, although supplies on the ground remain at a comfortable level for the time being. This squares with our intel on DUCs as 2018 saw the biggest uncompleted well inventory build by far, rendering tubing consumption mostly lackluster.

By now you know we lean heavily on our inventory metrics to illuminate the apparent consumption and months of supply data points. And with the current government shutdown and lack of access to import/export tonnages, our inventory data points along with our monthly mill shipment stats are the only things that can shed light on these key benchmarks. As it currently stands, based on the metrics we can confirm, consumption will end the year on a positive note with the quarterly months of supply metric nearing a number we haven’t seen in some time. While it “felt” to many that Q4 was DOA with the unforeseen news of the crude price retreat, in actuality the effect on drilling activity was negligible and in fact, defied the odds with an addition of 26 rigs from mid-October through December. This growth, however modest, helped to keep consumption from easing into the year-end. 

So now you have a thorough rundown on the past quarter but what might it mean for OCTG in 2019? At present US Capex is being recalibrated downward and will likely continue to be fine-tuned over the next month in hopes the crude picture becomes clearer. As a result, tubular demand is likely to be muted in 1H19. These events are muddying the picture for OCTG at a point when domestic suppliers were feeling about as optimistic as this industry can feel. 

As our inventory survey revealed, what might be considered the more positive impact of the Section 232 by many parties (a reduction in imports) was just beginning to be felt in various segments of the supply chain. For welded mills the 232 has been more of a millstone due to skyrocketing HRC costs, whereas seamless producers have enjoyed the benefits of raw material cost advantages that gave them a leg up on market share. Now with crude price volatility roiling the market, participants will be steeling themselves against bloated OCTG stocks: distributors will be less likely to boost inventories, E&Ps will be more cautious with their spends and OCTG producers won’t be in any mood to build reserves. This behavior lends itself to further paring of inventories in order to supply what demand there is. Not exactly what the doctor ordered. Here’s why…

If the Department of Commerce finalizes their preliminary determination from its second administrative review of existing anti-dumping duties on OCTG imports from South Korea this April, the cost to import the previously restricted supplies (232 quota) will become more prohibitive. Many expect this will be the outcome. When that happens the supply channel is further squeezed, leaving domestic suppliers to pick up the slack. If the economic incentive to produce domestically isn’t compelling and inventories have been slashed, prices will have nowhere to go but up. There aren’t many winners in this scenario. If, on the other hand, oil prices suddenly shoot skyward we’ll have another set of variables altogether. Clearly a mixed bag of possibilities at play. 

So, what’s a pipe ninja to do, you ask? Given the myriad of potentialities, our recommendation would be to proceed with caution but keep your eyes on the prize. It’s just how we roll in the pipe business.

Photo Courtesy Centric Pipe, LLC

Posted in CAPEX, Crude Oil Prices, Department of Commerce, DUCs, E&P, ERW Pipe, Government Shutdown, HRC, Inventory, OCTG, OCTG CAPEX, OCTG Consumption, OCTG Consumption & Pricing, OCTG domestic shipments, OCTG Exports, OCTG Imports, OCTG inventories, OCTG Inventory Survey, OCTG mill, OCTG Mills, OCTG Pricing, OCTG Processors, OCTG Producers, OCTG Spot Prices, OCTG Trade Case, Oil & Gas Industry, Oil & Gas Pricing, Oil Country Tublular Goods, oil country tubular goods, Oil Patch, Oil Prices, Oil Services & Equipment, Oilpatch, Onshore, Permian Basin, Prime Pipe, Q4, Seamless Pipe, Section 232, steel industry, Steel Tarrifs, Steel Trade Case, Supply Chain, Tubular Goods, U.S. CAPEX, upstream OCTG, WTI prices | Tagged , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

2019 OCTG Forecasts: Merry & Bright or Ho-Hum?

 

Encana-Rig&Pipe The Piceance basin in northwest Colorado

Photo Courtesy ©Encana Corp. All rights reserved.

Susan Murphy | The OCTG Situation Report

Susan Murphy Publisher + Editor-in-Chief

’Tis the season and it’s tradition for us to start it by ringing in our forecast of all things OCTG for 2019. As we began checking off our list of oilfield indicators in early November it appeared that our projections, starting with WTI, would be of good cheer. We were midway through our predictions when the White House threw in a lump of coal—a reprieve from Iran sanctions for eight countries—roiling oil markets on concerns of oversupply and potentially dashing our merry and bright expectations for OCTG in the new year. 

Whatever the case, the newfound volatility in oil prices forced us to reconsider a few metrics since a ho-hum oil forecast could slay our otherwise optimistic outlook. In terms of OCTG consumption, oil has been the gift that kept on giving for the past year. On December 6 and 7 OPEC plans to meet to determine where to go from here but based on the outcome of an earlier meeting on November 11, Saudi Arabia announced plans to cut their production in December; a move that was seen as a measure to halt the impending market slump. In order to proffer a forecast we are working on the assumption that the waivers issued to the eight countries that purchase Iranian oil were timed for the midterm election cycle, will be limited in scope and will ultimately result in stifled Iranian oil supplies longer term. With that said, we’re going to trim our more bullish oil price average for 2019 and hold it closer to ~$60/bbl. Fortunately, operators are generally better prepared for $55 – $60 oil than they were four years ago and US producers who locked in oil hedges for their production in 2019 are the least concerned. Our expectation for nat gas is in line with many consensus views, between $2.85 – $3/MMBtu; neither feast or famine for either commodity. When it comes to E&P Capex and how it plays into OCTG consumption, most would say, “the more the merrier.” On that note, tidings from Evercore ISI suggest North American operator budgets will rise ~+15% Y/Y while Cowen & Co recently adjusted their original +12% forecast for US spending to “flat to +15%” weighted toward 2H19 with the potential to increase if WTI shows greater stability and when Permian constraints are lifted. Both are based on WTI at $60/bbl. 

During their Q3 earnings call, Jeff Miller, Halliburton CEO, reported they were already seeing OFS demand rebound for crews when budgets reset and completions programs hit full steam in 2019. Oilfield research firm Infill Thinking believes that well completions in the US are on track to be ~16K this year, heading to ~19K in 2019, an increase of +19%. These mostly generous declarations should help to goose the rig count; our view is an average of 1,088 (+6% Y/Y) versus the present year at ~1,026 (+17% Y/Y). All of these metrics are supportive of further OCTG consumption growth in the coming year. Our forecast is provided in our November Report.

We analyzed OCTG pricing trends for Q4 into 1H19 in our September Report. Hot rolled coil remains elevated currently but is likely to average somewhat less per ton than 2018s annual average in 2019. However, if the US Mexican Canadian Agreement goes into effect in 2019 and 232 tariffs are lifted for either country more uncertainty could ensue.  

While predictions that tubing supplies would tighten between Q3 and Q4 didn’t materialize we still believe that they might. First, the prospect of a downshift in the Permian had many operators building DUC inventory, which is likely to result in accelerated completions activity in 2019. This, of course, provided WTI prices stay at or above $60/bbl. When considered with the OCTG quota on South Korea, from whom 63% of the tubing market was supplied in 2017, along with the likelihood of stronger penalties stemming from the second administrative review of the antidumping order on their OCTG imports, the threat of supply tightness becomes more real. Added to this is the significant draw on tubing inventories we noted in our Q3 Inventory Report, a hint that some upstream operators wanted to jump ahead of the fray. We will watch this metric closely again when we publish our 4Q18 OCTG Quarterly Inventory Yard Survey results in January 2019. 

There may not be a gravy train in sight for OCTG next year but 2019 certainly won’t be a turkey either. And for that we can all be thankful. 

Photo Courtesy ©Encana Corp. All rights reserved.

Posted in OCTG, OCTG 2019 Forecast | Tagged , , , , , , , , , , , , , , , , , , | Leave a comment

Oil Patch Confidential: 3Q18 OCTG Inventory Yard Survey

Photo Courtesy U.S. Steel Tubular Services

 Photo Courtesy U. S. Steel Tubular Services

Susan Murphy | The OCTG Situation Report

Susan Murphy Publisher + Editor-in-Chief

“It is a capital mistake to theorize before one has data.” ~Sherlock Holmes. Holmes clearly understood that having data to back up one’s conclusions is paramount and our exclusive quarterly OCTG inventory yard survey is further proof of this fact. Our inventory investigation and analysis is the only one of its kind in the world and serves as a bellwether of OCTG health throughout every segment of the supply chain.

Zeroing in on the Outcome 

Herewith we present the evidence leading to our determinations. 3Q18 presented a turn for the better offering a welcome break from the past six consecutive quarters of surplus supply. For the period ending 9/30/18, “prime” OCTG inventories contracted -4% throughout the lower 48. “Tri-state” (TX, OK, LA) OCTG inventories dropped -6% with the bulk of decreases seen in the mill/processor segment where stocks have been building for the past five quarters. OCTG inventories outside the tri-state region advanced +5% in Q3.

The Plot Thickens then Thins

Coming on the heels of a quarter where every OCTG category throughout the tri-state increased but one, we observed declines in all categories in Q3. Seamless stockpiles that have posted gains over the past four quarters retreated -7% Q/Q, welded products lagged far behind in destocking. The culprit? A lesser build in ERW materials over the quarter (both imports and domestic shipments) as well as the greater use of more seamless (premium) products for longer laterals. Digging deeper revealed stockpiles of alloy receded -5%—this after six consecutive quarters of sizable increases. Casing, which like alloy saw six consecutive quarters of gains, shrank -5%. Inventories of tubing that have remained stubbornly high ticked lower this quarter: -11%. Could it be end users are getting spooked by the drastic drop in tubing imports and buying before they’re left out in the cold? We’ll be discussing this in detail in our November OCTG Situation Report. In any case, our separate inventory survey of select distributors detected a nominal quarterly bump going into Q4. This finding—along with a small percentage build in E&P inventory ownership—confirmed our hunch that the bulk of the inventory draws in Q3 went downhole, providing a boost for Q3 quarterly consumption.

Our OCTG M.O.

So now you have some idea of the quarterly stats that we reported in our October OCTG Situation Report but here’s where it gets real and the real reason that accuracy in inventory matters. Because once we’ve collected all the surveys and input data from 125 OCTG yards throughout the lower 48 supply chain we can piece together the puzzle that allows us to provide readers with the most accurate measure of critical oil patch metrics: consumption and months of supply.

Cracking the Code on Consumption

Based on our thorough examination of Q3 inventory intel, we can now deduce that apparent consumption for the remaining months of 2018 will plateau, leading us back to our original (lower) consumption forecast issued in November of 2017. The reasons for this verdict are manifold. The most concise explanation is that six consecutive quarters of inventory increases—including the steepest quarterly hike since March 2009 in 2Q18—weighed heavily on consumption this year disrupting normal market trends. Despite diminished import shipments due to the 232 (-4% YTD compared to prior YTD); domestic shipments, while considerably higher YTD as of August (+36% compared to prior YTD), were somewhat muted Q/Q due to abundant inventory stockpiles reducing the need for restocking in addition to reports of moderately softer mill demand considering the level of activity in the oil patch. With one quarter left until the year’s end there simply isn’t enough time to mount a solid recovery especially when market participants are fixated on a combination of E&P capital austerity and notable budget exhaustion not to mention December 31 inventory targets/ad valorem taxes. All of these trickles down and pushes down on apparent consumption as is illustrated in the middle table on the last page of every Report. 

Jumping to Conclusions

The operative word when it comes to consumption remains “demand.” No mystery there we suspect most would declare. The good news is that 2018 OCTG consumption is still expected to be up Y/Y. Further, we anticipate that the consumption growth that was constrained due to the facts presented in our editorial this month will be deferred to 2019 provided inventories continue to ease and commodity prices remain resilient, something we look forward to witnessing. Case closed…until next quarter.

 Photo Courtesy U. S. Steel Tubular Services

Posted in 2018 E&P Budgets, E&P spending, Energy, Hot Rolled Coil, HRC, Inventory, OCTG Consumption & Pricing, OCTG domestic shipments, OCTG Imports, OCTG inventories, OCTG Inventory Survey, OCTG mill, OCTG Mills, OCTG Pricing, OCTG Processors, OCTG Producers, OCTG Spot Prices, Oil & Gas Industry, Oil & Gas Pricing, Oil Country Tublular Goods, Oil Patch, Oil Services & Equipment, Onshore, Permian Basin, Q3, Seamless Pipe, Section 232, steel industry, Steel Tarrifs, Third Quarter, Tubular Goods, upstream OCTG | Tagged , , , , , , , , , , , , , , , , , , , , | Leave a comment

OCTG Price Forecast: The 64K Dollar Question

Photo Courtesy Tenaris - Bay City - September Cover

Photo Courtesy Tenaris

Susan Murphy | The OCTG Situation Report

Susan Murphy • Publisher + Editor-in-Chief

“It is far better to foresee even without certainty than not to foresee at all,” ~Henri Poincare, author of “The Foundations of Science.” With a greater line of sight to the year-end and a better grip on the impact of the 232 we thought it would prove prescient to revisit our thinking on OCTG pricing for Q4 and into 2019 as the E&P forecasting season is upon us. 

The results of this month’s distributor spot market pricing survey made it clear that the 232 won’t add near as much to the bottom line as most were expecting—at least in 2018. And the meager increase M/M won’t dent operator pocketbooks as much as it will the morale of the supply prognosticators but it does point to pockets of underlying strength in the market. The bigger surprise for most is tubing’s unyielding drag on the composite price at this point in the year. 

So why the upset? Part of the blame can be aimed at copious amounts of pre-232 inventory. Our exclusive 1Q18 Inventory Yard Survey (April Report) showed a record hike in quarterly tubing inventories: the largest gain we’ve witnessed Q/Q since the Chinese import surge in 1Q09. That was followed in 2Q18 with another healthy increase—not a record, but nothing to brush aside when you consider the volume of tons in relationship to the lighter weight of the material. The other part of the equation can be found in the prolific oil-producing Permian where the number of DUCs almost doubled in the last year. The EIA reports that total DUCs jumped to 3,470 in August, up 32% from January. This run-up in DUCs comes as a result of multiple constraints: trucking, sand logistics, labor, fresh water sourcing and pipeline capacity (a setback until 2H19) among them. With well completions deferred in the mother of all shale basins, tubing demand was destined to take a hit. But not forever. Let’s remember that tubing has been a mainstay of the import market and few domestic mills have been incentivized to produce it. Ultimately, the convergence of tightening inventories, crimped imports and lack of domestic supply in the case of certain items will show up on the books. 

All things considered, we don’t see a meaningful increase in the composite price index before next year. With elevated inventories, Capex budget exhaustion, moderating raw material costs and year-end tax considerations top of mind we don’t expect to see prices improve much by December. 

Readers have suggested it’s never too early in the year to offer a preliminary forecast for 2019; and thus we go into considerable detail in our September market intel [LINK HERE]. We will revisit our forecast again when we organize our November Report and tender our read on the metrics that matter for the coming year. 

Taken as a whole, the 232 offers the domestic OCTG market a greater opportunity to profit in 2019. On the flip side, there’s the chance that increased domestic capacity, production and improved utilization rates along with lower input costs will keep prices in check. These two opposing forces will battle it out as long as the 232 as we know it today is in place. 

We end our editorial this month the same way we started, with a quote that pretty much sums up the present situation based on the unpredictability we’ve experienced in the oil patch this year. Simply put, “The future isn’t what it used to be!” 

Photo Courtesy Tenaris

Posted in Crude Oil Prices, Department of Commerce, DUCs, E&P, E&P spending, Energy, OCTG, OCTG Imports, OCTG inventories, OCTG Mills, OCTG Pricing, OCTG Processors, OCTG Producers, OCTG Spot Prices, Oil & Gas Industry, Oil & Gas Pricing, Oil Country Tublular Goods, Oil Patch, Oil Services & Equipment, Prime Pipe, Section 232, steel industry, Steel Tarrifs, Tubular Goods, upstream OCTG | Tagged , , , , , , , , | Leave a comment