Season’s Musings

christmas-in-the-oil-patch-kilgore-texas

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

2Q16 OCTG Inventory Survey Reveal: Ready to Roll or Running on Empty?

Pipes

Photo Courtesy ConocoPhillips Company.

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

The checkered flag has been waved, signaling the results of our 2Q16 OCTG inventory yard survey are in. It is here where the rubber meets the road, suggesting descending inventory stocks are paving the way for improvements moving forward. As many of you know we pull out all the stops for our quarterly surveys: tracking demand for OCTG throughout the entire supply chain. To ensure the most accurate results we involve a crew of people who count pipe at truck terminals, mills, processors and inspection yards across the lower 48 every quarter.

Gauging the health of the oil patch is the intent of our industry exclusive inventory survey and the takeaway for Q2 offers some modest encouragement. Turns out the draw down this quarter was very similar to last quarter’s results, coming in just under 3K tons less overall.

Just when we thought it was safe to call a bottom, OCTG pricing remains gridlocked. Once again distributors find themselves competing against a slew of distressed stock as we’ve noted. At the same time, we’ve heard multiple reports of renewed interest from would-be buyers, a decided improvement from all the tire kicking of late. Mill inquiries are picking up for the 3rd quarter, but the acceleration in HRC costs have made it exceedingly difficult for domestic ERW producers to compete with seamless producers and imports alike.

A few potential growth engines remain on the horizon, not the least of which is the 2017 E&P spending outlook that suggests E&Ps are revving up, eager to put the pedal to the metal – if currently stalled oil prices move north of $50 again. The recent news that the U.S. is on track to export more natural gas than it imports for the first time since 1957 might also prove a kick in the ‘gas’ in the days to come.

And then there’s the fact that OCTG months of supply is beginning to shift down M/M. There’s a lot riding on this metric so it’s a welcome break from the negativity that’s fueled the OCTG sector for the past year and a half.

As we race toward the close of the year, the question remains: are we in the home stretch? Despite the pundits, there’s no GPS for times like these. Our advice: buckle up but never curb your enthusiasm for the road ahead.

Posted in 2017 E&P Budgets, Crude Oil Prices, E&P, E&P spending, Energy, ERW Pipe, Inventory, OCTG, OCTG Consumption, OCTG Consumption & Pricing, OCTG domestic shipments, OCTG Exports, OCTG Imports, OCTG inventories, OCTG Inventory Survey, OCTG Mills, OCTG Pricing, OCTG Processors, OCTG Producers, Oil & Gas Industry, Oil & Gas Pricing, Oil Country Tublular Goods, Oil Patch, Oil Services & Equipment, Onshore, Prime Pipe, Q2, Supply Chain, Tubular Goods, upstream OCTG | Tagged , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

OCTG Downturn Goes Into Overtime. Will 2H16 Be A Game Changer? 

USS Patriot TC OCTG

Photo Courtesy US Steel Tubular Products

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

If you’re reading this today — congratulations, you’re still in the game! You’ve made it to the halfway point of a grueling year. June is the month we confer with a number of OCTG players from all walks of the supply chain to get their thoughts on the outlook for OCTG in the second half of the year. Suffice to say we always net some interesting color commentary.

While conversations ranged from well-worn speculation about oil prices to continued irritation over tubular imports, the one issue that spoke to all parties was the nagging high level of prime OCTG inventory and that’s what we’ll be concentrating on in our editorial this month. You may recall in the course of our 1Q16 OCTG inventory survey we noted a troubling decline in the pace of destocking and the corresponding high months of supply. Stubborn inventory levels and elevated months of supply are never good for the tubular sector but we knew there was more to these metrics than meets the eye. Stats are often distorted in protracted downturns and this downcycle is unprecedented. Thus, we’ve been working to dissect and decipher the current OCTG inventory and determine the percentage that is slow or non-moving, which we detail in our June market intel.

In general, the items that have been mostly benched are paired up with a corresponding segment of the market. Adding to the conundrum of high inventory volumes is the fact that new pipe typically sells before old plus the cost of the old inventory is greater than the current replacement cost. Then there’s the associated burden of maintenance expenses to safeguard older inventory, a good portion of which has been sitting on the ground deteriorating with the potential to be downgraded for other uses. Many of these items are a year old or more. It’s a recipe for disarray and that’s what the OCTG market is feeling. The “fix” for this bloated situation will ultimately come in various forms: scrapping and repurposing among them.

Thinking about the rig count for a moment: 1Q16 averaged 562 rigs, 4Q14 averaged 1,912 – that’s down 71%. Now consider where we were in terms of inventory at the end of March 2015 when we recorded the highest levels since the early 80s. We’ve worked through almost 1MM tons of OCTG inventory since then. No easy feat given the grim market.

While we discussed all manner of things OCTG with our pros, inventory was by far the most pressing of the topics. However we do want to report that some cautious optimism was expressed for 2H16 into 2017. And caution is key here folks as increased capacity by way of new mills remains a significant threat to recovery. Meanwhile, Evercore released their 2016 Global E&P Mid-Year Spending Outlook that presents a bullish North American land sentiment leading to a healthy rebound in 2017. According to their report, “NAM capex will be up 25% next year, which should drive a similar increase in the rig count.” They do submit that a higher percentage of the spend will be allocated for completions. We concur that new capital for 2H16 and 2017 will be directed predominantly to completing DUCs, workovers and refracs in an effort to bolster revenue streams.

The name of the game in this market is trying to find an upside for the downturn. In other words, consider this a drill for the next boom. Game on!

Posted in CAPEX, Crude Oil Prices, E&P, Energy, OCTG, OCTG Imports, OCTG inventories, Oil & Gas Industry, Oil & Gas Pricing, Oil Country Tublular Goods, Oil Patch, Oil Prices, Pipe, Prime Pipe, upstream OCTG | Tagged , , , , , , , , , , , , , , | Leave a comment