Mid-summer has arrived, time to tackle another quarterly inventory survey. As y’all know, every three months we launch our “fishing expedition” designed to measure demand for upstream OCTG. This involves culling inventory counts by surveying truck terminals, mills, processors and inspection yards throughout the entire U.S. supply chain. The net results for the period ending June 30, 2015 might help buoy some spirits.
The combination of slack demand with the surge in imports seen through May could have easily spawned increased stockpiles of OCTG. Instead, we’re pleased to report that inventories of “prime” U.S. OCTG decreased substantially in the past 90 days. This is nothing short of impressive all things considered and would have been all but impossible had it not been for the deep cuts in OCTG shipments made by domestic mills this year. The last time we witnessed a Q/Q decline in tons close to this extent was back in December of 2009. Our separate survey of select distributors in the U.S. registered a remarkable drawdown Q/Q as well; confirmation that distributors are keeping a watchful eye on inventory. Further detail is presented in the charts, tables and commentary in our complete July Report.
If crude pricing could stabilize in the mid 50s to 60s for the balance of the year inventories could be whittled down a couple hundred thousand tons by the end of Q4 provided imports continue the material downtrend that took hold in May. While this would improve oil patch sentiment, a greater bite needs to be taken out of inventory in order to see months of supply recede from the high number of months we’ve posted for May. For this we need to shore up demand. Easier said then done especially as oil prices have tumbled again of recent, which brings us to midyear E&P spending.
Given current WTI prices and the low prospect of a sustained rebound this year, any spending rally will be muted. According to Cowen and Company this is complicated by the fact that E&Ps have spent two-thirds of their total 2015 budgets in the first half of the year. Therefore additional capex will require upward revisions to budgets that can only come through higher commodity prices or more financing. With many hedging contracts set to expire in October cash flow will be further strained.
Granted, most parties are in the same boat and there’s little consolation in the stats on OCTG at the moment. Swimming upstream is a lot of work but for those who can stay afloat history tells us the rewards will equal the effort.