Following The 1Q17 OCTG Inventory Audit Trail

TSC Almeda two stacks crop-2smart-fix

Photo Courtesy Texas Steel Conversion

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy Publisher

It’s that taxing time of year when readers of The OCTG Situation Report count on us to roll up our sleeves and crunch the numbers in preparation for our exclusive Inventory Quarterly. Our analysis, derived from our yard survey of the U.S. OCTG supply chain, is essential in bringing a high degree of certainty to an otherwise elusive inventory metric—a claim no other publication can make. And with that we commence our audit of first quarter inventories.

Inventories of “prime” U.S. OCTG moved up slightly in Q1. The bulk of the build in “tri-state” (TX, OK, LA) OCTG inventories was reported in the West Texas/Permian basin. The increase in tons from outside of the tri-state region Q/Q was attributed mostly to elevated levels of activity in the New Mexico/Delaware Basin and Niobrara shale plays.

Surging activity brought a mixed bag of increases and decreases throughout every product segment across the tri-state region this quarter. The most significant of the changes correlated with the areas of greatest supply tightness as well as new supply again this quarter. The gains posted in our separate survey of select OCTG distributors demonstrated a decided vote of confidence for the oil patch from this group. Complete details about first quarter inventories and all the OCTG metrics that matter is provided in the April OCTG Situation Report.

While the increase in inventory wasn’t of grave concern, it’s new trajectory gives us pause. We can’t help but be somewhat uneasy when monitoring import volumes of late especially considering the additional capacity that is coming online domestically. Since November 2016, imported tons have continued their upward march with the import-a-palooza showing no sign of attrition. The recent results of the administrative review of anti-dumping (AD) duties on imports of OCTG from South Korea for the period 7/18/14 – 8/31/15 concluded that prices of the hot-rolled coil used to produce OCTG as well as Korean electricity prices were distorted. The highest duties were determined for Nexteel. SeAH was assigned a token duty while “all others” will pay a slightly stiffer penalty. The nominal increase in duties that was determined for all but Nexteel suggest that it is business as usual for the rest of the South Korean exporters who will likely push through healthy increases in exports this year. Until then expect that pipe supplies will remain strained and prices will continue in a state of flux.

Returning to inventory, we’ve been tracking and reporting on “active” versus stalled and/or obsolete OCTG inventory since our first deep dive into this weighty subject last year in June. At this point in time our analysis has determined a fairly significant portion of current inventory is made up of stalled or “homeless” materials defined as uneconomically expedient pipe, premium/semi-premium threaded and “exotic” onshore OCTG. Another portion is made up of offshore materials that have been benched for the time being. Obsolete items account for the balance. Also, we remind readers that new OCTG sells before old, which further bedevils inventory concerns.

Bottom line: while it’s tempting to get swept up in the momentum of the moment, the upswing in inventories— however slight—reminds us that a degree of caution must still be exercised. Visibility into oil markets for 2H17 is limited and any disruption could easily tip the ‘shales’ out of our favor.

Posted in Department of Commerce, E&P, E&P spending, ERW Pipe, First Quarter, Hot Rolled Coil, HRC, Inventory, OCTG, OCTG Exports, OCTG Imports, OCTG Inventory Survey, OCTG Mills, OCTG Pricing, OCTG Processors, OCTG Producers, OCTG Spot Prices, Oil & Gas Industry, Oil Country Tublular Goods, Oil Patch, Permian Basin, Q1, Seamless Pipe, Shale, Shale Plays, steel industry, Steel Trade Case, Tubular Goods, U.S. HRC Spot Price, upstream OCTG | Tagged , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

2017 U.S. OCTG Mill Supply Forecast: The Million ‘Tubes’ March

voestalpine Tubulars: Seamless Tubular Products

Photo Courtesy voestalpine Tubulars

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

The quote, “Prediction is very hard, especially about the future” captures the essence of the responses we received to our request for domestic OCTG mills supply forecasts in a year where uncertainty seems to be the only certainty. Thus, we braved this muddy matter with the hope of rising above the perils of prediction.

Our U.S. OCTG Mill Supply Forecast comes with the following set of assumptions for 2017: a) WTI averages $50 – $60/BBL; averages over or under this range will necessitate adjustments to the supply forecast and b) South Korea receives only a token increase in duties in the first OCTG anti-dumping (AD) administrative review scheduled for March 30 (with the possibility of an extension to April 12). We expand on this subject later in our editorial.

Our forecast reveals both domestic and foreign mills have the pedal to the metal potentially unleashing 112% more OCTG into the market in 2017 than 2016. The production of domestic seamless OCTG is expected to outpace that of welded, a trend that began in 2016 as the downturn lingered, HRC costs spiraled upward and mills struggled to stay busy. As the market continues to improve, the delta between ERW and seamless costs will widen making welded OCTG competitive for some of the more efficient mills and ERW’s market share will revert to more traditional levels. While seamless OCTG also occupies a greater piece of the import pie, we’ve increased the percent of welded imports Y/Y in the belief that South Korea will hike their shipments to levels closer to that of 2015 if the administrative review is decided in their favor.

Insofar as the final duties in the South Korean AD case are concerned, we’ve vetted every possible scenario only to arrive at an impasse. There’s the possibility that Trump’s team of protectionists including steel advocate, Secretary of Commerce, Wilbur Ross, could rule in favor of a more aggressive stance against South Korea. There’s also the case for the knock-on effect of the tariffs the Department of Commerce assigned to Korean steel producers in the HRC case, which exercises new powers granted under the Trade Preferences Extension Act of 2015 making it easier for industries to demonstrate injury. In this way, Korean OCTG producers are at greater risk for allegedly relying on Korean-produced HRC as well as dumped Chinese HRC to manufacture OCTG at export prices that arguably constitute dumping. Coupling this with the news that the Trump team is exploring alternatives to taking trade disputes to the World Trade Organization makes this case a “slam dunk” for some speculators.

But before anyone drops the mic and pops the cork there’s another side to the story and one that merits serious consideration especially as it applies to our relationship with our ally South Korea: geopolitical unrest. The fragile state of political affairs in both North and South Korea could outweigh the domestic steel industry interests in the near term, resulting in a nominal increase in duties for this first review. While there are strong arguments for either outcome, the recent announcement from U.S. Secretary of State Rex Tillerson that “the threat of North Korea is imminent,” puts us in the latter camp until further notice.

Meanwhile, this fickle situation is having a decided impact on the state of U.S. OCTG. To say that OCTG is in a “tight spot” is to put it mildly. Mills are under the gun to produce, expected to ramp up from near zero to sixty. Distributors are leaving no stone unturned in their search to find high demand products or offer substitutes. Korean importers and producers are in limbo, unsure whether to ship out or abandon ship. Operators are left feeling the heat as OCTG pricing stages a brisk recovery with mill price increase announcements coming fast and furious. If drilling activity continues unfettered, mills are expected to catch up with demand sometime in August. The question is: can this level of activity be sustained throughout the year? We all know when pipe isn’t moving downhole things go downhill and no one is eager for those days to return.

With OPEC determining a course for their May meeting, oil markets getting spooked and the specter of cost inflation looming, the tubular market hangs in the balance suggesting another test of our industry’s ‘metal’ may be on the horizon. So, what’s a pipe ninja to do? Unpredictable times call for unconventional wisdom: a reminder that reality is rarely ‘oil’ or nothing.

Photo Courtesy voestalpine Tubulars

Posted in E&P, Energy, ERW Pipe, OCTG, OCTG Consumption, OCTG domestic shipments, OCTG Imports, OCTG Mills, OCTG Trade Case, oil country tubular goods, Oil Patch, Oil Services & Equipment, Onshore, Seamless Pipe | Tagged , , , , , , , , , , , , , , , , | 2 Comments

OCTG: “Days of Future Past”

pipeco-bw-pipe-2-150-dpi

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

Posted in OCTG | Leave a comment

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

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