Will ‘Chill, Baby, Chill’ be the Mantra for OCTG in 2019?

XTO Energy - Delaware Basin

Photo Courtesy XTO Energy

Susan Murphy | The OCTG Situation Report

Susan Murphy | Publisher + Editor-in-Chief

As we make our way through the dog days of August one begins to wonder if the “drill, baby, drill” mantra from 2008 will evolve into “chill, baby, chill” for 2019? OFS brass are forecasting drilling activity for the balance of the year will be ‘chillin,’ while softening OCTG prices are sending a chill down the spines of suppliers. Just looking at the many down arrows on our cover this month would lead many to believe that summer has given way to fall. So, is it all downhill from here? Let’s discuss. 

There’s certainly a lot to unpack when it comes to predicting how 2019 will ultimately play out. But with four months left in the year and news of a yield curve inversion warning of a potential recession within 8 to 24 months we can pretty much rule out an unexpected fortuitous event that might turn things around. Even the more recent and positive trajectory of crude prices; a combination of geopolitical events (Iran) and OPEC’s decision to extend production cuts through March 2020, don’t seem to be able to shake the stranglehold that Wall Street is exerting on E&Ps. This is presenting a conundrum for many who are at a loss to figure out how to goose demand and prices for all things OCTG.

On the latter, the OCTG marketplace continues to be mostly toxic. An all-out price war is taking place and while this may sound good for buyers we must issue a caveat emptor as we’re seeing quotes (many “unsolicited”) that seem too good to be true. Broadly speaking, most parties recognize “loss leader” prices are unsustainable in the long run. This brings us to the fact that Q4 program negotiations are currently underway at a time when US HRC pricing has come off the bottom. After three consecutive HRC pricing hikes steel producers are reporting a moderate level of stickiness and a slight recovery in HRC prices is forecast into the year-end. And while the Section 232 tariffs and quotas haven’t been a boon for OCTG, traders say tariffed HRC imports are having difficulty competing with domestics. Scrap prices have also risen to the occasion recently and are expected to remain stable throughout the balance of 2019. 

So, how do suppliers square higher raw material costs with existing market conditions? With Wall Street rewarding E&P profitability over production, rig counts slowing and the now cliche expression “budget exhaustion” rampant among E&Ps when discussing Capex, the odds of any OCTG price increase taking hold this year are doubtful. Unless, of course, there’s a significant reduction in inventories that would tamp down supplies. Thus, as long as OCTG stocks outstrip need, the laws of supply & demand will prevail. 

While there’s a lot of uneasiness in the market and numerous possibilities for it, we can all agree on one thing and that is “knowledge is power.” On that note, we’ll leave it to pop-culture icon and baseball great Yogi Berra to close our Report and offer some of his ‘wisdom’ on how to navigate uncertain times: You’ve got to be very careful if you don’t know where you’re going, because you might not get there.”

NOTE: Our monthly blog posts offer a slice of the content we publish in The OCTG Situation Report every month. For a complimentary copy of our intel please visit: https://www.octgsituationreport.com/subscribe

Photo Courtesy XTO Energy

Posted in 2019 E&P Budgets, CAPEX, Crude Oil Prices, Department of Commerce, E&P, E&P spending, Energy, ERW Pipe, Horizontal Drilling, Hot Rolled Coil, HRC, Inventory, OCTG, OCTG 2019 Forecast, OCTG Imports, OCTG inventories, 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, Prime Pipe, Seamless Pipe, Section 232, steel industry, Steel Tarrifs, Supply Chain, Tubular Goods | Tagged , , , , , , , , , | Leave a comment

2Q19 OCTG Inventory Analysis: A Calm Before the Storm or Smooth(er) Sailing Ahead?

The OCTG Situation Report July 2019 Photo Courtesy Boomerang Tube, LLC

Photo Courtesy Boomerang Tube, LLC

Susan Murphy | The OCTG Situation Report

Susan Murphy | Publisher + Editor-in-Chief

The results of our exclusive 2Q19 Quarterly OCTG Inventory Yard Survey could be viewed as a beacon of hope for those who expressed trepidation about the outcome in our midyear market conversations last month. Turns out parties with an ear to the ground controlled inventories extremely effectively and managed to stem the tide from Q1 that could have easily rocked the boat this quarter. 

While most of you know the ropes by now we’ll remind everyone that we host our exclusive quarterly surveys in order to measure demand for OCTG throughout the entire US supply chain, delivering the most accurate OCTG inventory updates in the oil patch so that our subscribers can better navigate the course ahead. This quarter’s survey (period ending 6/30/19), revealed that “prime” OCTG inventories in the L48 expanded by a “manageable” amount all things considered. The bulk of increases were posted in the mill/processor segment; concentrated mainly with processors. Hikes were recorded in all but one category throughout the tri-state. Alloy stocks saw the greatest build Q/Q in Q2. Carbon was the only product category registering a decline. Gains in the closely-watched tubing category were witnessed again this quarter. 

The dampened levels of oilfield activity attributable to E&Ps continued commitment to capital discipline discussed last month in our June Report had a direct impact on the lower intensity of inventory builds and were especially evident in Oklahoma and West Texas this quarter. Lower import volumes Q/Q also played into shifts witnessed in the inventory mix this quarter. This was particularly apparent in the drop in carbon products; an import mainstay. Interestingly, tubing stocks were buffeted by twin forces in Q2: one that kept any potential build subdued and one that tempered the possibility of greater destocking. The two factors contributing to this situation were a modest drop in imports and a US DUC count that, despite a slight retreat in Q2, remains well elevated, respectively. 

So, what might the Q2 stats viewed in tandem with our other proprietary quarterly metrics tell us as we cruise into the second half of the year? First, observing the sinking Q/Q permit metric makes it increasingly clear that a rise in rig releases is in store for the next five months. This doesn’t mean a rig count collapse is on deck but conforms with the consensus opinion that “flat is the new up.” This presumption arose in the wake of the WTI volatility that occurred in Q2 and quashed the likelihood for a second half activity rebound that may have otherwise come about. Our estimate for Q2 consumption also offers a less than buoyant probability that OCTG demand will improve much over the balance of the year. At the same time, if we review the depressed Q2 consumption metric for 2018, it could have proven foreboding but didn’t materialize as such. Even though that scenario is unlikely in 2H19, due to different oil patch circumstances Y/Y, we simply can’t rule out the possibility that this metric could continue flat or grow slightly. Meanwhile, we’re keeping a close watch on HRC as mills attempt to shore up prices with a rash of recent price hikes. While this could prevent OCTG prices from drifting down M/M through December, at the moment we don’t see this torpedoing any forecasts for the next six months. 

In closing, we view the results of the 2Q19 inventory survey as setting the OCTG market on an even keel especially given the somewhat murky conditions we’re facing. Inventories of tubular goods may not yet be in a safe harbor, but they’re certainly better positioned to weather any challenges that might arise in the remaining months of the year. And that mates, is as close to “smooth sailing” as one could hope to hear.

NOTE: Our monthly blog posts offer a slice of the content we publish in The OCTG Situation Report every month. For a complimentary copy of our intel please visit: https://www.octgsituationreport.com/subscribe

Photo Courtesy Boomerang Tube, LLC.

 

Posted in 2019 E&P Budgets, Crude Oil Prices, Department of Commerce, DUCs, E&P, E&P spending, Energy, Hot Rolled Coil, HRC, Inventory, OCTG, OCTG Consumption, OCTG Consumption & Pricing, OCTG inventories, OCTG Inventory Survey, 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, Prime Pipe, Q2, Seamless Pipe, Supply Chain, Tubular Goods, upstream OCTG | Tagged , , , , , , , , , , , , , , , , , , , | Leave a comment

OCTG 2H19: Rolling with the Punches

The OCTG Situation Report June 2019 Photo Courtesy Surge Energy

Photo Courtesy Surge Energy

Susan Murphy | The OCTG Situation Report

Susan Murphy | Publisher + Editor-in-Chief

Each year in June we take the temperature of the oil patch, speaking with people from every walk of the supply chain to get a sense of the market from their perspective. This exercise inevitably yields valuable and colorful commentary on the present state of affairs. Last year could have been summed up in “232” words as discussions were almost entirely variables on the theme of the investigation. In reviewing the results of this year’s midyear market calls, one phrase best captures the sentiment for OCTG in 2H19: “rolling with the punches.”  

A sense of OCTG overcapacity is permeating the patch at this juncture, which is giving pause to many participants. We covered some of the more recent events leading to this view in our May Report. Coupled with the past week’s crude price inflection that sent the price/bbl into bear market territory, this scenario gives rise to increasing uncertainty moving into the back half of the year. No surprise when considering budgets were set at $50 – $55/bbl. It isn’t so much that demand is waning, it’s more that supply is omnipresent. As one party put it, “the operator story has remained mostly static since Capex budgets were announced earlier this year”; it’s the supply side that’s been caught flat-footed after assuming that the buoyant oil prices through most of 1H19 would prompt budget increases around this time. In past year’s operator commitments to discipline have been mostly met with a nod and a wink. Tighter grips on operator spends translate to an unlimited amount of supply chasing a limited amount of demand. Even with the possibility that the upcoming OPEC meeting will result in an extension of the production-cut agreement, it is unlikely such an event will budge the strict budgets of most operators or entice Wall Street to extend more credit. 

Speaking of Wall Street, the word “credit” was used deliberately and repeatedly and in a way we haven’t heard since the late 2000s. Indeed, folks from the supply side corroborated a heightened awareness of the risks associated with overextending credit during such a state of flux. Another phrase that punctuated many conversations was, “dog eat dog.” Fierce competition for business has become ‘trolling’ for dollars, making it difficult for the market to predict a bottom. Most were in agreement that prices will tilt down for the remaining months of 2019 although a few remained optimistic thinking things might turn for the better in Q4. We discuss this in greater depth in our June Report.

Intel from investment banking firm Cowen says that E&Ps spent 28% of their ’19 budgets in Q1 and many others anticipate a similar situation to 2018 when “budget exhaustion” was the operative buzzword into the year-end. Remarkably, even with all the exhaust-talk late last year the rig count really didn’t suffer and it’s possible we won’t see a tremendous contraction at the end of this year although available funding will, in many cases, be funneled to completion efforts and remain steady for the “majors.” Private E&Ps remain the “wild card.”

American poet Robert Frost was quoted saying, “the best way out is always through.” While encouraging signs for the short term were scarce throughout our confab, the consensus seems to be on “consolidation” as the answer to many of the challenges the industry faces. Consolidation in supply and consolidation in operators—circumstances that appear to be taking shape around us—now offer possibilities for a brighter vision for the future as we approach ’20/20.’

NOTE: Our monthly blog posts offer a slice of the content we publish in The OCTG Situation Report every month. For a complimentary copy of our intel please visit: https://www.octgsituationreport.com/subscribe

Photo Courtesy Surge Energy

Posted in 2019 E&P Budgets, CAPEX, Cowen & Company, Crude Oil Prices, Department of Commerce, E&P, E&P spending, Energy, ERW Pipe, Inventory, OCTG, OCTG 2019 Forecast, OCTG 2H19, OCTG CAPEX, OCTG Consumption, OCTG Consumption & Pricing, OCTG domestic shipments, OCTG Exports, OCTG Imports, OCTG inventories, OCTG Inventory Survey, 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, Q2, Section 232, steel industry, Steel Tarrifs, Steel Trade Case, Supply Chain, Tubular Goods, upstream OCTG | Tagged , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

May’s OCTG Snooze Turns to Breaking News

Photo Noble Energy Inc. Courtesy ©Jim Blecha: oilandgasphotographers.com

Photo Noble Energy Inc. Courtesy ©Jim Blecha: oilandgasphotographers.com

Susan Murphy | The OCTG Situation Report

Susan Murphy | Publisher + Editor-in-Chief

What began as a month of snooze abruptly filled with breaking news. So we decided to investigate some of the headlines of the day in our May Report. On Friday, May 17 there was the announcement of an “apparent” settlement in the steel tariff portion of the new NAFTA (the USMCA). The day before, on May 16, we learned that tariffs on Turkish steel were being halved. And then, on May 20, just as we were going to press came the news of the final antidumping (AD) decision for the third period of review (ARP3) on OCTG imports from South Korea necessitating some 11th hour alterations in our editorial. But before we bury the lead, the subject du jour of late seems to be tubing. 

Actually, the tubing situation plays right into Korean imports for 2019 so we tackled this twofold issue first. We’ve covered this subject in almost every Report since the quotas (sans tariff) were announced for South Korea in late March 2018. Originally we predicted a tightening in tubing supplies toward the end of 2018. That didn’t materialize in part due to E&P budget exhaustion in late Q3 converging with a crude price inflection that surprised to the downside in October and dragged on through the end of December. There was also the significant influx of imported tubing in 1H18 that was slow to be consumed on account of a buildup of DUCs; the bulk of which were stacking up in the Permian. Turns out tubing shipments as a whole were only down by small percent Y/Y in 2018 despite the 232, with better than half of all imported tubing shipments received in the first part of the year alone. Our expectation going into the final ARP3 determination this month was that this would not be the case for 2019 as US tubing supply was certain to suffer the consequences of being severely crimped. Our pre-ARP3 judgement was well supported and detailed in our current Report.

This new development brings tubing supply for 2H19 into question and may blunt our argument about the potential for shortages. Our fact check revealed, the volume of tubing received thus far into the year from South Korea was shipped to get ahead of the imminent ARP3 duties. It was also noted that no other country had taken up the tubing gauntlet as of 1Q19. Now with the newly determined, less severe, AD margins Korean supply could drop off this year but to a far lesser degree than anticipated. Of course, whether tubing consumption is due for a hike in 2H19 is based around the expectation that crude pricing doesn’t implode and activity remains steady. Hard to state now if this news will dampen the tubing pricing recovery. Bottom line: pricing is a function of supply and demand and now we must also entertain the possibility of added tubing supply before new domestic sources of supply come on stream in 2020. We consider this angle in depth this month. In any case, we’d be remiss not to recommend readers keep their ears to the ground and eyes on our monthly intel for updates. 

Continuing with the breaking news is the announcement by the administration eliminating the 25% steel tariffs (effective within 48 hours of the announcement) that were originally imposed on Canada and Mexico shortly after the 232 was announced. The takeaway: a split between those who view this as mostly a non-event for supply in 2019 and those who see escalating imports as inevitable. Others don’t believe this will be the last we hear on the subject and that some type of volume restraint is still likely to be instituted. The real spoiler is the notion that anyone who imports green tubes, pipe, coil or billets from anywhere other than Mexico and Canada will be at a disadvantage. 

And lastly, we reported the White House reduced existing 50% punitive tariffs on Turkish steel imports (imposed in August of 2018) to 25%. At this juncture, we don’t see much cause for concern on this development.  

And that, readers, is all the news that’s fit to print for now. You may return to your regularly scheduled programs and we’ll meet up again next month when we assess the mid-year market sentiment throughout the OCTG supply chain during our annual June oil patch confabs.  

NOTE: Our monthly blog posts offer a slice of the content we publish in The OCTG Situation Report every month. For a complimentary copy of our intel please visit: http://www.octgsituationreport.com/subscribe

Photo Noble Energy inc. Courtesy © Jim Blecha: oilandgasphotographers.com

Posted in DUCs, E&P, Energy, ERW Pipe, HRC, Inventory, OCTG, OCTG Consumption, OCTG Consumption & Pricing, OCTG domestic shipments, 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 Prices, Oil Services & Equipment, Onshore, Permian Basin, Prime Pipe, Seamless Pipe, Section 232, Shale Plays, steel industry, Steel Tarrifs, Steel Trade Case, Supply Chain, Tubular Goods, upstream OCTG | Tagged , , , , , , , , , , , , , | Leave a comment

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.

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