OCTG ‘Crude’ for Thought 

Forest Oil Corporation, Granite Wash. Lantern Rig 14 on the Edwards 1-22H.

  Photo Marubeni-Itochu Tubulars America Inc.
Courtesy ©Jim Blecha: oiladngasphotographers.com.

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

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

 

About The OCTG Situation Report

Susan Murphy is the Publisher + Editor in Chief of The OCTG Situation Report, a leading authority focused on the North American Oil Country Tubular Goods market. Susan has worked alongside the founder of The OCTG Situation Report, Duane Murphy (and yes, there is a family connection!) for the past decade assisting in various aspects of producing the monthly publication and special projects including market research and development. It had long been suspected that Susan carried the 'OCTGene,' a fact that was confirmed when she took the reins in 2012. A native of Michigan and now practicing cowgirl, Susan employs her education from both the University of Michigan and Michigan State University bringing her expertise in the areas of research, marketing, branding and creative and technical writing to The Report. She has also enjoyed a successful business career as a lauded entrepreneur, running her own brand/marketing and advertising/design firms.
This entry was posted in E&P, E&P spending, Energy, ERW Pipe, Hot Rolled Coil, HRC, Inventory, OCTG, OCTG Consumption & Pricing, OCTG domestic shipments, OCTG Exports, OCTG Imports, OCTG inventories, OCTG Mills, OCTG Pricing, OCTG Spot Prices, Oil & Gas Industry, Oil Country Tublular Goods, Oil Patch, Oil Services & Equipment, Prime Pipe, Seamless Pipe and tagged , , , , , , , . Bookmark the permalink.

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