OCTG: “Days of Future Past”

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Photo Courtesy B&L Pipeco Services

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

In the words of baseball legend Yogi Berra, “the future ain’t what it used to be.” As we embark on our publication’s  31st annual ‘state of the industry’ address, we find this quote to be more fitting than ever and not necessarily limited to OCTG. But OCTG is our focus here so let’s see if we can determine what the immediate future holds and its relationship to the metrics that defined the past year in OCTG.

The year-end OCTG stats in our table on page 6 of the February Report offer a bird’s-eye view of the trends that defined the OCTG landscape over the past three years. While the bulk of 2016 OCTG tonnages are less than those posted for 2015, there are two exceptions that foretell of things to come. The consumption per rig metric increased again in 2016, a nod to continued advancements in drilling technology and improvements in efficiencies. Also on display in our table are the decided gains made in market share for domestic seamless products last year. This development speaks to the opportunities that await seamless OCTG producers in the year ahead.

If we could drill down to a single word that sums up the current moment it might be “erratic.” In no particular order, we have: extreme shortages in tubing and surface casing; mills racing to ramp up production and closing in on capacity; congestion at Port Houston causing import cargo bottlenecks; a delay in the Korean OCTG tariff ruling/administrative review; an iron ore price spike; talk of another round of OCTG mill price increase announcements and speculation on what 2H17 looks like. Yes, there’s a lot to digest.

Our Inventory to Mill Sales stats of late are indicative of the vastly improved sentiment that has permeated (‘Permian-ated!’) the oil patch. In the simplest terms, the inventory to mill sales ratio metric measures the amount of inventory compared with the number of sales. The spike in this ratio seen in March and April of 2016 denotes the lowest point in OCTG consumption since mid 2009. This metric will become increasingly important in the days to come as OCTG mills scale up and imports rise to meet demand.

Herein lies the potential pitfall of sharp supply responses both domestic and imported. As the U.S. rig count rises and demand for OCTG escalates, mills across the globe are understandably eager to get things rolling. If concerns about an overextended U.S. recovery ensue and oil markets suddenly sour, that inventory build restarts the cycle seen in the U.S. OCTG Inventory to Mill Sales Ratio chart as of February 2015 when OCTG consumption began to tumble and prices started to languish. This prospect reinforces the need to keep supply chains under control until there’s more visibility into the second half of 2017.

The delicate balance that exists in the oil patch this year will surely keep us on the edge of our seats. Until the OCTG whisperer reveals what 2017 holds there’s one thing of which we can all be certain as stated by another baseball great Dan Quisenberry who said, “I’ve seen the future and it is very much like the present, only longer.”

Photo Courtesy B&L Pipeco Services

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OCTG 4Q16 Inventory: Is the Yard Half Empty or Half Full?

port-of-houston-authority

Photo Courtesy Port of Houston Authority

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

The past 26 months in the oil patch have run our industry through the mill, so the glimmer of light we see at the end of the tunnel sets the tone for a decidedly happier new year. Each January (and every quarter) we go to great lengths to determine if the ‘yard’ is half full or half empty. Our analysis is based on our exclusive quarterly inventory yard survey, designed to gauge demand for OCTG in the U.S. The results of our survey are measured by the yard, specifically: truck terminals, mills, processors and inspection yards across the lower 48 and by all indications this quarter’s outcome puts OCTG on firmer footing.

In Q4 inventories of “prime” U.S. OCTG decreased by a healthy percentage. Tonnage declines were reported in every product segment in Q4 in keeping with surging activity across the tri-state region. Interestingly, many of the more significant changes noted correlated with our recent distributor survey pinpointing areas of supply tightness. Our separate survey of select OCTG distributors reinforced this collective’s growing confidence even as they strategically hedge against rising material costs. Another positive sign seen again this quarter is the uptick in threaded and coupled tonnages (versus plain end) as a percent of tri-state inventory tonnages.

So far so good, so let’s continue with the encouraging 2017 E&P spends. According to Evercore ISI, North American capex should rally ~35% with the U.S. spearheading the recovery and Canada trailing with a modest 10% upswing. It’s important to issue the caveat that only a small percentage of operators have announced their budgets. The bulk of their outlooks are expected during their 4Q16 earnings calls. The new administration’s anticipated policies (regulatory reform, infrastructure spend & protectionism among them) are likewise considered bullish for OCTG.

While numerous catalysts hover, we would be remiss if we didn’t give equal time to potential pitfalls. Just because we can see the forest for the trees doesn’t mean we’re out of the woods. 2017 could bring any number of political or economic black swans including the possibility that OPEC might reverse course. Any of these scenarios can trickle down to OCTG and are reminders that it remains prudent to keep a short supply chain in times of uncertainty.

After two years of relentless cost-cutting there’s also the looming probability of added OFS cost increases. On that note, we’re ever mindful of the heightened resilience of raw material costs and how they’re impacting the tubular market. U.S. scrap prices have risen 46% since September 2016, +50% Y/Y. During this same period hot rolled coil costs increased 23%, +58% Y/Y. It’s almost as if coil is suddenly “the new black.” With its numerous uses and applications many of which are in high demand, the energy market is a shrinking piece of the pie. Trade cases against HRC have been successful in diminishing imports and tightening domestic versus international spreads: a welcome relief for domestic manufacturers who are seeking to recoup margins. These raw material costs, which are being passed onto OCTG mills that are increasingly limited to domestic suppliers, began showing up in our pricing surveys last month and have continued into January.

OCTG prices are also being buoyed by supply tightness that is showing up in most every region throughout the prevailing shale plays. This dearth is expected to continue through 1Q17 as domestic suppliers scramble to meet emerging demand and until imports reach our shores.

This leads us back to OCTG inventory where we’ve been tracking stalled (defined as no current demand and/or items unused for more than a year) and obsolete tubular goods. We first reported on our inventory tonnage analysis in June of 2016 and updated it in October for Q3. Complete details about this situation, OCTG supply tightness and our inventory results are provided in this month’s OCTG Situation Report. Continuing in a positive vein, months of supply for the action-packed fourth quarter showed a marked improvement and a metric not seen since early 2015. Thus, by our analytics we see the ‘yard’ as half full – suggesting that inventories are stacked in our favor, at least through 1H17.

Posted in 2017 E&P Budgets, E&P, E&P spending, Energy, Hot Rolled Coil, HRC, Inventory, OCTG, OCTG CAPEX, OCTG Imports, OCTG inventories, OCTG Inventory Survey, OCTG Mills, OCTG Pricing, OCTG Processors, OCTG Producers, Oil & Gas Industry, Oil Country Tublular Goods, Oil Patch, Oil Services & Equipment, Onshore, Q4, Tubular Goods, upstream OCTG | Tagged , , , , , , , , , , , , , , , , , | Leave a comment

Season’s Musings

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Photo: Annual “Christmas In The Oil Patch,” Kilgore, Texas

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

As we approach our 31st year in OCTG reporting we thought we’d share a bit of our history with y’all. Our company’s publication, The OCTG Situation Report, was conceived from a recognized “black hole” in the tubular market. At the time, back in 1986, there was no formal data available to accurately gauge the most important OCTG metrics or measure mill performance. The unfavorable market conditions and tsunami of OCTG imports cost some mills their business.

It was at this time that Duane Murphy took up the gauntlet and set out to create an industry benchmark to report distributor spot pricing, field inventory data, shipment stats and market share analysis. Those that were alive back in the early 80s remember that technology had not yet emerged from the “dark ages.” Back then Mr. Murphy was left to his own devices, developing a computer program that ran on the popular gaming console of the day: a Commodore 64.

Shortly thereafter the first OCTG pricing and inventory surveys were launched. Over time valuable management tools were added to the Situation Report’s arsenal such as “months of supply,” a metric which was first applied to the OCTG market by Mr. Murphy and which has now become one of the most watched indices in the industry. The rest, as they say, is history and we are now celebrating our third decade in business serving oil & gas companies, steel tubular companies, distributors, processors, component manufacturers, financial institutions and management consulting companies worldwide. We consider it an honor to serve this big “small world” known as the oil patch.

That’s our story and we’re sticking with it. Now tell us yours…

In the meantime, here’s wishing you the best and brightest of the holiday season!

Photo: Annual “Christmas In The Oil Patch,” Kilgore, Texas

Posted in Christmas In The Oil Patch, OCTG, Oil Country Tublular Goods, Oil Patch | Tagged , , | Leave a comment

Santa vs Scrooge: 2017 OCTG Forecasts

Photo Noble Energy Inc. Courtesy ©Jim Blecha: oilandgasphotographers.com

Photo Noble Energy Inc. Courtesy ©Jim Blecha: oilandgasphotographers.com

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

As we prepared to weigh in on our 2017 OCTG forecasts we couldn’t help but look back over the past two years with a mix of shock and awe. It was Thanksgiving Day 2014 when OPEC all but gave us ‘the bird,’ and the oil patch has struggled to recoup ever since. Since then we’ve gone from a time when it was hard to imagine pumping oil for much less than $60/bbl to reluctantly accepting $50/bbl as the new normal. And while the present year has served up more than enough apprehension, we would all do well to remain calm and bright in keeping with the coming holiday season.

Barring any economic black swans, we can begin by crossing off “feast or famine” from the list of possible scenarios in 2017. That said, in order to set some baseline assumptions and tender some pertinent guidance we’re forced to address the elephants in the oil patch: fickle commodity pricing and OPEC’s lack of solidarity for starters – both tantamount to a lump of coal in the stocking. Early consensus views suggest WTI pricing will swing between $45 – $55/bbl in 2017, making us pine for the “good ‘oil’ days.” NatGas is expected to average >$3.25.

When it comes to E&P budgets it is generally accepted “the more the merrier.” While 2017 spending may not be a coup de grâce, no one should look a gift horse in the mouth either. As noted by oilfield service analyst firm InfillThinking.com, capex trends for majors versus independents are set to diverge in 2017 – except in shale  where expectations for double-digit spending increases are high. Stock market investors are also betting on an oil recovery with $28B in U.S. driller stock sales so far this year. Firms that have released preliminary North American E&P spending updates (Evercore & Barclays among them) are currently predicting a capex spending rebound between 17 – 25% for 2017. We don’t mean to dash spirits here but we need to remind our readers that OCTG typically runs <10% of total E&P spends.

And while none of this is written in ‘shale,’ the anticipated boost in capex with upstream allocations predominately directed toward onshore projects should goose the rig count in the coming year. We’re projecting the U.S. rig count will average ~640, roughly 30% over 2016. This in turn will nudge OCTG consumption, for which we’re forecasting low double-digit growth Y/Y. Might even give rise to a tiny bit of cheer from the supply side? In the grand scheme of things, however, this forecast is pretty chilling considering we haven’t seen levels like this since the early 2000s. No matter how you slice and dice it, OCTG consumption will continue its slow go until a greater share of capex is devoted to drilling activities and drilling campaigns are reset.

Nonetheless, we’re cautiously optimistic about the green shoots we’re witnessing. First is the potential for the new administration to institute policies that will favor domestic steel demand. While the push toward high-grading doesn’t always promise more wells per rig it does have the potential to produce an increase in longer horizontal laterals branded “super laterals.” That will most certainly fuel consumption tonnages but we still have a way to go. In order to see this reality materialize, oil prices will need to stabilize at or above $60/bbl. One possible caveat: this development could pose another challenge for welded mills as the super laterals often require OCTG like P110 or T-95/P110S and seamless pipe with semi-premium or premium connections.

Turning to OCTG pricing for the new year, we see the path of least resistance for OCTG to strengthen near-term. Domestic scrap and hot rolled coil (HRC) prices have rebounded and both are heading higher. This particular round of raw material increases has paved the way for an incremental uptick in OCTG pricing in the months to come. No surprise, as we were writing our editorial this month we began receiving mill price increase announcements intended to offset the rise in raw material costs. We anticipate that OCTG prices will firm moderately in the new year. Be that as it may, even in the face of mill price increases and the potential for a rally, speculative imports could easily thwart this fragile recovery.

As we prepare to ring in the holiday season we offer our sincere well wishes to you and yours. And that folks, is a wrap.

Photo Noble Energy Inc.
Courtesy ©Jim Blecha: oilandgasphotographers.com

Posted in 2017 E&P Budgets, Crude Oil Prices, E&P, E&P spending, OCTG, OCTG Consumption, OCTG Consumption & Pricing, OCTG Forecast 2017, OCTG Mills, OCTG Pricing, OCTG Producers, Oil & Gas Industry, Oil & Gas Pricing, Oil Country Tublular Goods, Oil Patch, Oil Prices, Oil Services & Equipment | Tagged , , , , , , , , , , , , , , | Leave a comment

3Q16 Inventory: Cracking the Case of the Absent OCTG Tonnages

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Photo Courtesy Sooner Pipe, LLC

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

“It is a capital mistake to theorize before one has data,” ~Sherlock Holmes. Holmes clearly understood that having data to back up one’s conclusions is paramount and our quarterly OCTG inventory yard survey is further proof of this fact. This investigation and analysis is the only one of its kind in the world and serves as a bellwether of OCTG health for every segment of the supply chain.

Herewith we present a piece of the puzzle that leads to our determinations. Our exclusive yard survey of the U.S. supply chain revealed that U.S. inventories of “prime” OCTG contracted 2% in the most recent quarter (period ending 9/30/16). The only possible mystery observed Q/Q is the slower velocity of inventory draws. This in part stems from new and strategic inventory builds in anticipation of higher sales volumes and activity. Our separate survey of select OCTG distributors in the lower 48 registered an inventory rally in Q3 versus a slide in inventories in Q2, foretelling a hint of growing confidence in this group.

Another indication of better days ahead gleaned from our survey is a gain made in threaded inventories this quarter. Digging deeper we discovered tonnage declines in every product segment except tubing in Q3. Moreover, a lower level of inventory destocking was detected in the seamless segment. Clues to these changes can be found in our Report this month.

Our mill sources are seeing some momentum for Q4 but it is being tempered by the usual suspects of late: pricing pressure from imports, stubborn inventory liquidation and, in the case of welded mills, the pain inflicted by seamless producers content to trade margins for market share. For now the steady rise in U.S. HRC (hot rolled coil) pricing has abated and a bottom seems to be in sight within the next couple of months. This should offer a modicum of relief for some. U.S. scrap has trended lower too and has likely reached a floor, but not enough to cover the current OCTG price decline.

The operative word for recovery remains demand. “Elementary!” we suspect most would say, but all roads continue to lead to this conclusion. OCTG pricing, meanwhile, continues bumping along the bottom as we slog through the seasonally slow fourth quarter. Be that as it may, there are a few signs of recovery in the pipeline that simply can’t be ignored: improving crude & nat gas prices, an uptick in U.S. permits, rig count momentum, and increased E&P Capex forecast for 2017. And with that we can say case closed…until next quarter.

Posted in DUCs, E&P, E&P spending, Energy, ERW Pipe, Hot Rolled Coil, HRC, Inventory, OCTG, OCTG CAPEX, OCTG Consumption, OCTG Imports, OCTG inventories, OCTG Inventory Survey, OCTG Mills, OCTG Pricing, OCTG Processors, OCTG Producers, OCTG Spot Prices, Oil & Gas Industry, Oil Country Tublular Goods, Oil Patch, Onshore, Prime Pipe, Q3, Seamless Pipe, steel industry, Trade Case, Tubular Goods, U.S. HRC Spot Price, upstream OCTG | Tagged , , , , , , , , , , , | Leave a comment

Oh-CTG! The Problem with Pipe: Rolling with the Punches in 2H16

chevron-september-2016-cover-photo

Photo Courtesy Chevron Corporation

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

Welcome ladies and gentlemen to the “heavyweight” main event of the month: the buzz over the bitter cost disparity between seamless and welded OCTG and the narrowing pricing delta between the two. In one corner we have seamless OCTG and its opponent, welded OCTG in the other. “Let’s get ready to rumble.” 

This fight heated up with the spectacular rally in U.S. hot rolled coil, a conversation we’ve highlighted in recent months. So let’s break the status quo down for closer examination. ERW manufacturers’ margins basically depend on two things: the cost of the raw materials – mostly steel to the tune of ~65-70% – and the price of oil. The unrelenting high cost of HRC coupled with the low oil price environment has been a one-two punch for welded mills and the current OCTG price/ton average only exacerbates these issues. While HRC costs are finally softening (down ~16% from mid-June peak), in many cases leading up to this time the cost of HRC exceeded the cost of the pipe making the circumstances unusually distressing for mills welded to ERW. This extremely rare combination is what ERW producers have been facing.

And just when you think things couldn’t get more precarious along comes the recent HRC trade case that dealt a blow to Korean coil suppliers, one of the more qualified sources for less expensive HRC materials. This pushes mills to scout other sources for their needs adding further pressure on ERW producer costs. All the while OCTG end-users are anxiously guarding their bottom lines favoring capex discipline over capex growth.

This brings us to another millstone for ERW producers: seamless competitors. The imminent capacity from two new seamless contenders in the domestic marketplace threatens to shake things up even further. At one time seamless mills were less interested in competing with welded mills, but the outcome of the downturn of 2014 changed all that. Every mill has come out swinging with a “take no prisoners” mind-set.

Clearly at this junction the mills that are capable of diversifying their product offerings are better prepared to slug it out. For integrated facilities, opportunities exist to produce a variety of steel products that can help bolster margins while the energy market bobs and weaves. Those in a position to strategically leverage global parities (where applicable) for various products also have an edge.

What’s a welded mill to do? From an academic point of view there are some options available but the fact remains that greater demand is the bottom line for every supplier. Barclays recently released preliminary Upstream Spending Survey suggests that 2017 North American capex budgets could increase ~20% fueling an uptick in “onshore” activity over the next year. It is interesting to note, however, that 75% of survey respondents expect well costs to decline even more over the next 12 months.

Despite the fact the challenges are steep, welded mills aren’t down for the count. It’s not as though every operator is basking in a seamless buyers market. Some still haven’t seen seamless costs come down low enough on their specific pipe requirements to motivate them to swap out their current ERW string designs.

So what’s ahead when it comes to seamless vs. welded OCTG? When activity levels are restored the offerings will presumably return to historical norms where welded OCTG is the more economic alternative. The difficulty lies in bridging the gap that will likely be created when the new seamless mills aggressively market their products: fitting the bill to fill the mill and keeping the ERW/seamless price differential uncommonly close for an extended period of time.

There’s certainly no shortage of action in the oil patch these days and it’s no place for the faint of heart. Those that are determine to go the distance would do well to keep their eyes on the prize and remember the words of Muhammad Ali who said:”It isn’t the mountains to climb that wear you out; it’s the pebble in your shoe.” 

Posted in ERW Pipe, Hot Rolled Coil, HRC, Inventory, OCTG, OCTG inventories, OCTG Inventory Survey, OCTG Mills, OCTG Pricing, OCTG Producers, OCTG Spot Prices, Oil & Gas Industry, Oil & Gas Pricing, Oil Country Tublular Goods, Oil Patch, Oil Prices, Oil Services & Equipment, Seamless Pipe | Tagged , , , , , , , , , , , , , , | Leave a comment

Will OCTG Prove Its ‘Metal’ in 2016?

Murphy Oil Corporation August 2016 Cover

Photo Courtesy Murphy Oil Corporation

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

It’s medal mania all over again as we bask in the afterglow of the 2016 Rio Olympic Games. And it’s “metal” mania here in the OCTG Situation Room as we dig into the various drivers that impact oil country tubular goods. The buzz of recent seems centered on the hot rolled coil (HRC) trade case outcome. While we share details of the results in our August market intel we offer highlights that relate specifically to OCTG here.

We reported there was a pickup in inquiries in early June and there are some E&Ps who have recently revised their E&P budgets modestly upward for the balance of the year (mainly Permian basin drillers). If there isn’t another surprise dive in crude prices, any recovery in drilling activity should help support OCTG pricing and cover the very real increased costs of coil (up ~64% after bottoming in late 2015) with which domestic welded OCTG producers have been wrestling. At the moment U.S. HRC spot prices are trending slightly lower (~$600/st) and there is insufficient OCTG demand to push coil pricing upward in the immediate term. Likewise, there’s been no jump in HRC pricing from the recent trade case determinations.

Notwithstanding the meager OCTG price increase this month, overall we see OCTG prices continuing rather choppy and increasing only marginally through the year end barring any unforeseen hiccups. But before we get ahead of ourselves, we need to look at escalating OCTG imports that threaten any chance of a sustained recovery and ask is the OCTGenie out of the bottle? License data for July is pointing to an increase of ~30% M/M for July OCTG imports bringing import volumes in the range of 96K tons for the month. Simply put, until commodity prices stabilize surplus supply from any source is unwarranted. If shipments remain elevated in the coming months without a corresponding steady uptick in demand expect to see tubular inventories reverse course and prices struggle to maintain current levels.

No matter how you slice it, we still have a ways to go to overcome the many hurdles raised by the OILigarchy (OPEC’s) run for marketshare. Right now no country is winning the oil price war leaving us to channel our inner Olympians who would remind us, “the harder the battle, the sweeter the victory.” 

Posted in 2016 E&P Budgets, Crude Oil Prices, Department of Commerce, E&P, E&P spending, Energy, Hot Rolled Coil, HRC, OCTG, OCTG Imports, OCTG Mills, OCTG Pricing, OCTG Spot Prices, Permian Basin, U.S. HRC Spot Price | Tagged , , , , , , , , , , , , , , , , , , , | Leave a comment