The new year got underway with a blustery winter wallop: WTI prices struggling to reach $50/bbl coupled with a government ‘meltdown.’ We trust this isn’t the writing on the wall for 2019, so rather than wallow in woe we’ll kick things off with the results of our exclusive 4Q18 OCTG Inventory Yard Survey that may help some put a little spring in their step.
Published every quarter, our OCTG Inventory Yard Survey is the only one of its kind in the world. It is designed to assess the health of the industry by measuring demand for OCTG throughout the entire supply chain (truck terminals, mills, processors & inspections yards) across 125 yards over the lower 48 (L48).
Our 4Q18 yard survey of the US supply chain revealed that “prime” upstream OCTG inventories in the L48 contracted appreciably for the period ending 12/31/18. “Tri-state” (TX, OK, LA) OCTG inventories were cleared out considerably with the bulk of decreases seen in the mill/processor segment. OCTG inventories outside the tri-state region were tapered down as well in Q4.
Much of what we witnessed with inventory turnover in Q4 can be attributed to the constriction in OCTG imports, not to mention the usual suspect—end of year inventory targets sought to reduce ad valorem taxes. While declines were recorded in every product category throughout the tri-state, ERW products were the most impacted this quarter. Welded OCTG inventories dropped a record-setting high with many (non-mill) participants citing slowing activity and a significant reduction in inbound activity versus outbound shipments. Coincidentally, those facilities that reported the largest drops in welded inventories this past quarter are those that routinely receive large amounts of imported OCTG.
In a “typical” quarter we would use the results of our inventory survey to connect the dots—providing our subscribers with key oil patch metrics like consumption and months of supply. These are critical stats that are generated, in large part, by way of our quarterly surveys and are the very reason that accuracy in inventory matters. But these are anything but typical times. January 22 marked one month of an unprecedented government shutdown that rendered even the US census bureau MIA. And thus there are no data points available for what would have been their most recent release: November 2018 import and export stats. It’s enough to make one feel like banging their head against a wall!
So how do the inventory stats sync up with all other metrics this quarter? What conclusion can be drawn by the whopping drop in welded stocks seen across the board—especially in facilities holding the highest volumes of imported goods? If we look at combined domestic and imported OCTG shipment stats for the second and third quarters (all that’s available for comparison at this juncture due in part to the government shutdown) we see steadily declining tons of welded shipments. We also can’t help but note the decided drop-off in overall imports in Q2 and Q3 and what will most certainly be the same for Q4. Moreover, imported ERW’s share of the import market YTD (through October 2018) contracted considerably. Thus, it’s no surprise that welded products would be thinning out heading into the year-end and that was confirmed by our survey. Carbon (a mainstay of imported shipments) inventories were pruned substantially over the quarter as were inventories of casing. Closely watched stocks of tubing (another imported mainstay) were reduced again in Q4, although supplies on the ground remain at a comfortable level for the time being. This squares with our intel on DUCs as 2018 saw the biggest uncompleted well inventory build by far, rendering tubing consumption mostly lackluster.
By now you know we lean heavily on our inventory metrics to illuminate the apparent consumption and months of supply data points. And with the current government shutdown and lack of access to import/export tonnages, our inventory data points along with our monthly mill shipment stats are the only things that can shed light on these key benchmarks. As it currently stands, based on the metrics we can confirm, consumption will end the year on a positive note with the quarterly months of supply metric nearing a number we haven’t seen in some time. While it “felt” to many that Q4 was DOA with the unforeseen news of the crude price retreat, in actuality the effect on drilling activity was negligible and in fact, defied the odds with an addition of 26 rigs from mid-October through December. This growth, however modest, helped to keep consumption from easing into the year-end.
So now you have a thorough rundown on the past quarter but what might it mean for OCTG in 2019? At present US Capex is being recalibrated downward and will likely continue to be fine-tuned over the next month in hopes the crude picture becomes clearer. As a result, tubular demand is likely to be muted in 1H19. These events are muddying the picture for OCTG at a point when domestic suppliers were feeling about as optimistic as this industry can feel.
As our inventory survey revealed, what might be considered the more positive impact of the Section 232 by many parties (a reduction in imports) was just beginning to be felt in various segments of the supply chain. For welded mills the 232 has been more of a millstone due to skyrocketing HRC costs, whereas seamless producers have enjoyed the benefits of raw material cost advantages that gave them a leg up on market share. Now with crude price volatility roiling the market, participants will be steeling themselves against bloated OCTG stocks: distributors will be less likely to boost inventories, E&Ps will be more cautious with their spends and OCTG producers won’t be in any mood to build reserves. This behavior lends itself to further paring of inventories in order to supply what demand there is. Not exactly what the doctor ordered. Here’s why…
If the Department of Commerce finalizes their preliminary determination from its second administrative review of existing anti-dumping duties on OCTG imports from South Korea this April, the cost to import the previously restricted supplies (232 quota) will become more prohibitive. Many expect this will be the outcome. When that happens the supply channel is further squeezed, leaving domestic suppliers to pick up the slack. If the economic incentive to produce domestically isn’t compelling and inventories have been slashed, prices will have nowhere to go but up. There aren’t many winners in this scenario. If, on the other hand, oil prices suddenly shoot skyward we’ll have another set of variables altogether. Clearly a mixed bag of possibilities at play.
So, what’s a pipe ninja to do, you ask? Given the myriad of potentialities, our recommendation would be to proceed with caution but keep your eyes on the prize. It’s just how we roll in the pipe business.
Photo Courtesy Centric Pipe, LLC