As May is historically a light news month and the first four months of this year have been unusually weighty, we thought it might be prudent to review just how far the OCTG sector has come over the past year. Last year at this time the buzz in the oil patch revolved around “lower for longer.” This year the question is, how much higher and how much longer when it comes to a host of metrics, rig counts and pricing among them? Those are topics we’ll analyze next month in our 2H17 outlook.
No surprise: leading the charge is oil, the price of which has risen 21% over the past 12 months carrying all other related metrics along for the ride. The 80% surge in the US rig count has surpassed even the most bullish of forecasts despite range-bound WTI prices. This, of course, presents a catch-22: the rebound in the rig count and consequent ramp in US onshore production can come with a price tag that trickles down to OCTG. Weighing on oil’s fragile state are questions about OPEC’s direction for production quotas and their ability to adhere to them if agreed upon when members gather for their meeting on May 23.
While demand has driven OCTG prices north, most of the more significant gains we’re tracking owe their newfound vigor to the market tightness we’ve reported over the last couple months. OCTG raw materials have been in a state of flux of late, too, a fact that can’t be ignored when considering how this year may play out and not just for OCTG. U.S. HRC, which is ~$600/st (down from its Jan 2 high) is drifting lower given the recent free fall in iron ore prices. Since iron ore is integral to the steel making process, this crash has wide-ranging implications. Forecasters have predicted that iron ore, currently USD ~$60/st, will continue its decline, perhaps as much as ~20% over the course of the year. At the same time U.S. domestic scrap prices, which have buttressed domestic HRC prices, are also under pressure. The crackdown on illegal induction furnace capacity in China (the largest consumer of domestic Chinese scrap) prompted the country to jump on the scrap export wagon, a move that could depress US domestic scrap and HRC prices. What does this mean for OCTG? It means that OCTG producers who source third party raw materials will have an opportunity to recoup some of the heavy losses sustained over the past two years. And the fact is, domestic mills are now bearing the added costs of ramping up and need to do this to continue to serve a growing energy market.
All this brings us back to China, the world’s No. 2 economy and the epicenter of the demand debate for all things energy related. Most analysts will tell you that the crash in the commodity markets that commenced in mid-2014 was driven by the slowdown in the Chinese economy. While there have been reports that the Chinese economy will see accelerating GDP growth over the next couple of years many analysts aren’t buying it. And if the Chinese aren’t “buying it,” whatever “it” may be, its stability is likely to be challenged. These are the underpinnings of the concerns we have when we consider the fate of crude prices and ultimately OCTG for 2H17.
Meanwhile domestic and imported OCTG shipments are escalating at an intense velocity as everyone is eager to capitalize on this welcome window of growth. With inventories building as of 1Q17, even slightly, no one is immune to a correction in the oil markets. Every member of this tight knit community wants to be optimistic but there’s too much at stake to throw caution to the wind just yet.
As we contemplate what the balance of the year might bring, we can’t help but ruminate on the words of Charles Darwin who said, “It is not the strongest of the species that survives, nor the most intelligent. It is the one most responsive to change.” And that remains our takeaway—come what May.
Photo Marubeni-Itochu Tubulars America Inc.
Courtesy ©Jim Blecha: oiladngasphotographers.com