We often speak of the health of the oil patch in terms of the general state of the market, but it’s not often that it’s discussed in the broader context of the “human condition.” This year “health,” when considered in relationship to the oilfield, has taken on a new meaning with sobering implications for oilfield services. While cases in the US are few and far between, the threat of a widespread Coronavirus outbreak has infected oil markets (especially as China is the world leader when it comes to oil-demand growth) and could potentially impact tubular production overseas.
And so we begin our “Annual State of the Industry Report” with what is, by all definitions, a black swan. While there’s simply no telling how far and wide this epidemic might spread, what has been ascertained is that it is weighing on commodity prices and as we all well know anything that afflicts crude price tends to trickle down to OCTG.
The Dallas Federal Quarterly Energy Survey published in late December offered a mixed bag when it came to the outlook for 2020. Most respondents didn’t expect much in the way of a respite for the new year and that sentiment accompanied their call for a ~$55/bbl oil price heading into budget season. As E&Ps do their best to button up their 2020 drilling plans, the low commodity prices for both oil and gas could bite the hand that feeds the industry. CAPEX forecasts were already trending down as of late last year so the current price environment suggests operator spends will go south for the winter. How this unfortunate scenario ultimately plays out will determine any adjustments later this year. One thing to bear in mind as it pertains to OCTG spends is that operators who are benefiting by innovation, structural change and cyclical deflation can do a great deal more with less now so this doesn’t necessarily mean cuts will strike at the heart of the tubular goods market.
With such intense dynamics before us, our year-in-review report may seem like an afterthought but it’s always very telling. And telling it is for all of the many subscribers to our monthly market intel. Also, see page 9 of our February Report for a great deal of color on the Y/Y/Y stats. Meanwhile, the greatest “activity” in the oil patch right now seems to be the “active” capacity reported by domestic OCTG mills. This isn’t to say they’re anywhere near “production” capacity limits but orders are steady into April. The key this year will be in maintaining the delicate supply demand balance.
We predict we’ll see imports return to the market as soon as this spring and continue tracking similarly to the monthly import counts recorded in 2019 from there. That is, if the coronavirus doesn’t rear its ugly head in one or more of the “top 10” import countries where multiple cases of the illness have already been reported. If that were to hobble import production, then all bets for our pricing outlook (discussed in our February Report) for 2H20 are off.
While the future of OCTG in 2020 is unpredictable it’s never insurmountable. After all, steel market participants are known for their iron will. Thus, it may help to remember the words of Eleanor Roosevelt who said, “It takes as much energy to wish as it does to plan.”
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