Something about this current period in oil patch history feels like “deja vu all over again.” Others might call it “that sinking feeling,” harking back to 2009. Either way it certainly hasn’t put a spring in anyone’s step this April. Q1 is behind us but our inventory survey makes us leery about what lies ahead. We wish we could delay the inevitable – permanently – but that wouldn’t serve any purpose.
This month we hosted our exclusive OCTG Inventory Survey, designed to measure demand for OCTG. We survey the entire supply chain including truck terminal, mill, processor and inspection yards throughout the lower 48 every quarter. As many of you know we are the only pipe publication in the world that conducts such a survey.
Understanding inventory dynamics is a good way to glean the health of the oil patch. To that end, we believe that it is essential to collect, analyze and report actual OCTG inventory counts in order to provide a complete and accurate picture of the changes that have taken place in the upstream U.S. OCTG market quarter over quarter.
Once actual inventory counts have been input into our spreadsheets we can provide another vital barometer called Months of Supply. In the simplest terms, months of supply is inventory tonnage divided by consumption (demand) tonnage for any given period. An inventory buildup can be interpreted either as a signal of weaker than anticipated demand or that demand is expected to grow in the future. Lean inventories can suggest that demand is stronger than forecast or that demand is expected to slack in the future. A balanced market is typically considered about 4.2 months of supply.
Our yard survey of the U.S. supply chain revealed that inventories of “prime” OCTG in the lower 48 states increased a mere 4% for the most recent quarter (period ending March 31, 2015). In-depth detail on this quarter’s findings can be found in the charts, tables and commentary in our April market intel.
Before you accept this seemingly “encouraging news” at face value considering the state of the oil patch, we have to inform you that this was by no means a straightforward quarter. In the course of processing our inventory results we came upon an interesting conundrum for which the term “Murphy’s Law” comes to mind. You probably know that the definition of the law is: “if something can go wrong, it will.”
That said, the results of our survey ran counter to our expectations. We had anticipated an inventory build in the neighborhood of +11%. So what happened?
First, some background: when a high level of imports meets with a lower level of inventory it can artificially inflate consumption. We knew that this situation would eventually balance out due to the inherent lead-lag relationship of shipments to consumption, but we didn’t want to inadvertently mislead anyone about first quarter consumption or its cousin, months of supply. So we donned our detective caps and got busy again in an effort to get to the bottom of the suspected “MIA” OCTG. In the end, a number of factors contributed to this outcome, which we expound upon in our Report this month. We believed an explanation was important to consider when contemplating crucial first quarter metrics lest readers wonder “what’s in our pipe?”
Bottom line: when we entered our estimates for March along with our inventory final count the OCTG consumption picture came into sharp focus, arriving at a number not seen since November of 2009, illustrating the stark, albeit depressing reality of today’s oil patch. And thus we close the month of April with the hope that next month might be less taxing for everyone in the business.
Photo Courtesy OMK Tube, Inc.