As we make our way through the dog days of August one begins to wonder if the “drill, baby, drill” mantra from 2008 will evolve into “chill, baby, chill” for 2019? OFS brass are forecasting drilling activity for the balance of the year will be ‘chillin,’ while softening OCTG prices are sending a chill down the spines of suppliers. Just looking at the many down arrows on our cover this month would lead many to believe that summer has given way to fall. So, is it all downhill from here? Let’s discuss.
There’s certainly a lot to unpack when it comes to predicting how 2019 will ultimately play out. But with four months left in the year and news of a yield curve inversion warning of a potential recession within 8 to 24 months we can pretty much rule out an unexpected fortuitous event that might turn things around. Even the more recent and positive trajectory of crude prices; a combination of geopolitical events (Iran) and OPEC’s decision to extend production cuts through March 2020, don’t seem to be able to shake the stranglehold that Wall Street is exerting on E&Ps. This is presenting a conundrum for many who are at a loss to figure out how to goose demand and prices for all things OCTG.
On the latter, the OCTG marketplace continues to be mostly toxic. An all-out price war is taking place and while this may sound good for buyers we must issue a caveat emptor as we’re seeing quotes (many “unsolicited”) that seem too good to be true. Broadly speaking, most parties recognize “loss leader” prices are unsustainable in the long run. This brings us to the fact that Q4 program negotiations are currently underway at a time when US HRC pricing has come off the bottom. After three consecutive HRC pricing hikes steel producers are reporting a moderate level of stickiness and a slight recovery in HRC prices is forecast into the year-end. And while the Section 232 tariffs and quotas haven’t been a boon for OCTG, traders say tariffed HRC imports are having difficulty competing with domestics. Scrap prices have also risen to the occasion recently and are expected to remain stable throughout the balance of 2019.
So, how do suppliers square higher raw material costs with existing market conditions? With Wall Street rewarding E&P profitability over production, rig counts slowing and the now cliche expression “budget exhaustion” rampant among E&Ps when discussing Capex, the odds of any OCTG price increase taking hold this year are doubtful. Unless, of course, there’s a significant reduction in inventories that would tamp down supplies. Thus, as long as OCTG stocks outstrip need, the laws of supply & demand will prevail.
While there’s a lot of uneasiness in the market and numerous possibilities for it, we can all agree on one thing and that is “knowledge is power.” On that note, we’ll leave it to pop-culture icon and baseball great Yogi Berra to close our Report and offer some of his ‘wisdom’ on how to navigate uncertain times: “You’ve got to be very careful if you don’t know where you’re going, because you might not get there.”
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Photo Courtesy XTO Energy