Each November we examine numerous oilfield metrics to determine what might be in the cards for the coming year. Will the deck be stacked in favor of or against OCTG in 2018? Here’s our read.
On November 30, the powers that be (OPEC) met to determine whether to double down on the production quotas they curbed (first time in eight years) in a bid to support prices when they gathered last year in November. The odds were that the cuts would be extended beyond the March 2018 expiration and that was the outcome. Although geopolitics remain a wildcard in the high-stakes game of oil price roulette, the current outlook is mostly bullish with global demand soaring in addition to strong economies in the US and Europe and near record crude imports in China.
At press time WTI was ~$58/bbl—a potential ace in the hole for US drilling & completion activity moving forward. The fact that the oil price rally occurred about the time shale-blazers were talking turkey regarding 2018 E&P budgets could prove propitious, even though it doesn’t guarantee capex increases at a time of operator focus on returns over growth. Three years of flagging oil prices have constrained global investments in conventional projects leading us to believe that oil prices are poised to move higher over the next couple of years provided there are no black swans on the horizon. Thus, we are predicting choppy oil prices throughout the coming year and a bump in the rig count for 2018. We expect the rig count ramp-up to come in fits and starts throughout 2018. This helps to establish a framework for our OCTG consumption projection, but that comes with some caveats as well. Greater detail on all of our many forecasts can be found in this month’s Report.
We’re forecasting demand for OCTG will improve incrementally boosted by growth in the rig count but we’re holding our 2018 consumption/rig stats essentially in line with 2017 due to the likelihood of fewer wells per rig (i.e. lowered efficiencies mostly due to changing experience levels of drilling crews during rig count recoveries) over the coming year. Greater per well footages stemming from longer laterals will help to offset losses from lower well counts/efficiencies. Oilfield research firm Infill Thinking recently reported that as the tight oil industry evolves this cycle, a growing sub-surface footprint (measurable in frac sand volume) is replacing surface sprawl (i.e. rig and well counts). In 2017 and 2018, Infill Thinking projects US well counts to average about half of the prior cyclical high. Meanwhile, Lower 48 oil production is growing just as fast as near the prior peak thanks to improving reservoir contact and recovery in tight oil intervals. Sand volumes doubling up from prior peak volumes help explain how the tight industry is growing like before but with fewer wells drilled.
When it comes to the OCTG pricing outlook for 2018 all bets are off but we’re willing to step into this minefield for the sake of our loyal readers. The difficulty with this forecast comes from the fact that there is a multitude of potential actions buffeting this metric: from rampant OCTG imports to the 232 investigation—even the ramifications of dissolving NAFTA. Starting with imports, there’s a clear and present danger in the excessive volumes we’ve witnessed this year. With a market share of 59% YTD, the peril of imports doesn’t end at pricing: it erodes the domestic OCTG industry as a whole. The 232, facing a looming report deadline of January 22, 2018, has further confounded the market leading to a barrage of exports from a host of countries all vying for new opportunities and utter bewilderment for suppliers of tubular products trying to address RFPs. Implementation of tariffs on pipe/steel from Mexico or Canada, if they were to be enacted, could benefit US pipe producers in the long run (market share/pricing), but at what cost to overall trade?
As we move toward the close of another year in the oil patch we’re reminded, no matter what’s in store for the coming year, that life isn’t about holding all the cards but playing those you hold well. Game on!
Photo Courtesy Anadarko Petroleum Corp.