September is the month that we traditionally take the pulse of the industry. For the better part of the past four years we’ve been happy to report that the OCTG sector was bursting with energy. It doesn’t take a brain surgeon to diagnose the current state of the oil patch as “touch and go”: making most prognoses for the next six to nine months a bitter pill to swallow.
It would be very easy to run down a list of symptoms that characterize the current market malaise, but frankly we’re sick and tired of discussing them. As we attempt to eke out some semblance of hope from the recent WTI collapse we have to give OCTG producers an honorable mention. Producers, both foreign and domestic, have mostly fallen in line with declining crude prices. In fact, the U.S. OCTG trade deficit narrowed to its lowest level in 7-years as of July 2015. While these events alone aren’t a panacea for the ailing oil patch they are ‘necessary evils’ that will help pave the path to recovery.
And it doesn’t hurt that inventories of OCTG are dropping; it might seem like a snail’s pace but at least they’re moving in the right direction. We will get a better handle on this important metric when we publish the results of our exclusive Quarterly Inventory Survey next month. One would expect OCTG prices to climb as import and inventory levels are restored to more “normal” volumes, but demand has OCTG between a rock and a hard place. Mills are scrambling to figure out their next moves as a result. We’re not convinced that the “mill direct” model and the logistical issues it presents will solve the problems that befall the tubular industry. Actually, we fear a move of this magnitude could eventually backfire on all parties. Meanwhile, from the looks of this month’s OCTG pricing one would think we were monitoring ‘steal’ market prices. The steep rate of decline observed feels like a race to the bottom with no “bottom” in sight. We can’t help but wonder how this situation will play out.
We’d be remiss if we didn’t include a mention of the momentum building on Capitol Hill to lift the 40-year-old ban on crude exports. A U.S. House panel has voted in favor of the bill putting the legislation in motion. There are many who believe this will prove a shot in the arm to energy producers. Like most policy debates this one has its share of dissenters both on and off the Hill that say U.S. crude exports will only flood a glutted world market. Stay tuned.
While there’s no immediate relief for the challenging condition facing OCTG in the short and medium terms, the one thing we do know is that negative energy is contagious. The real work now is in steeling oneself from this affliction: coincidentally it’s called an iron will and it’s as good a prescription as any.
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