It’s that taxing time of year when readers of The OCTG Situation Report count on us to roll up our sleeves and crunch the numbers in preparation for our exclusive Inventory Quarterly. Our analysis, derived from our yard survey of the U.S. OCTG supply chain, is essential in bringing a high degree of certainty to an otherwise elusive inventory metric—a claim no other publication can make. And with that we commence our audit of first quarter inventories.
Inventories of “prime” U.S. OCTG moved up slightly in Q1. The bulk of the build in “tri-state” (TX, OK, LA) OCTG inventories was reported in the West Texas/Permian basin. The increase in tons from outside of the tri-state region Q/Q was attributed mostly to elevated levels of activity in the New Mexico/Delaware Basin and Niobrara shale plays.
Surging activity brought a mixed bag of increases and decreases throughout every product segment across the tri-state region this quarter. The most significant of the changes correlated with the areas of greatest supply tightness as well as new supply again this quarter. The gains posted in our separate survey of select OCTG distributors demonstrated a decided vote of confidence for the oil patch from this group. Complete details about first quarter inventories and all the OCTG metrics that matter is provided in the April OCTG Situation Report.
While the increase in inventory wasn’t of grave concern, it’s new trajectory gives us pause. We can’t help but be somewhat uneasy when monitoring import volumes of late especially considering the additional capacity that is coming online domestically. Since November 2016, imported tons have continued their upward march with the import-a-palooza showing no sign of attrition. The recent results of the administrative review of anti-dumping (AD) duties on imports of OCTG from South Korea for the period 7/18/14 – 8/31/15 concluded that prices of the hot-rolled coil used to produce OCTG as well as Korean electricity prices were distorted. The highest duties were determined for Nexteel. SeAH was assigned a token duty while “all others” will pay a slightly stiffer penalty. The nominal increase in duties that was determined for all but Nexteel suggest that it is business as usual for the rest of the South Korean exporters who will likely push through healthy increases in exports this year. Until then expect that pipe supplies will remain strained and prices will continue in a state of flux.
Returning to inventory, we’ve been tracking and reporting on “active” versus stalled and/or obsolete OCTG inventory since our first deep dive into this weighty subject last year in June. At this point in time our analysis has determined a fairly significant portion of current inventory is made up of stalled or “homeless” materials defined as uneconomically expedient pipe, premium/semi-premium threaded and “exotic” onshore OCTG. Another portion is made up of offshore materials that have been benched for the time being. Obsolete items account for the balance. Also, we remind readers that new OCTG sells before old, which further bedevils inventory concerns.
Bottom line: while it’s tempting to get swept up in the momentum of the moment, the upswing in inventories— however slight—reminds us that a degree of caution must still be exercised. Visibility into oil markets for 2H17 is limited and any disruption could easily tip the ‘shales’ out of our favor.