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  • Susan Murphy

Q1 OCTG Inventory Yard Survey: The Gold Standard

When it comes to wealth every quarter counts. It’s no different in the oil patch where our subscribers count on our exclusive quarterly OCTG Inventory Surveys to provide them with a wealth of knowledge about the health of the upstream market by measuring demand for OCTG. For this, we survey the entire supply chain including truck terminal, mill, processor, and inspection yards throughout the lower 48. Our tally for the period ending March 31 reveals inventories expanded for the fifth consecutive quarter with the bulk of increases posted in the mill/processor category.

Here’s how Q1 inventories stacked up throughout the country: L48 “Prime” OCTG stockpiles increased +3%. While that may not sound like a great deal, the last time we reported inventories close to this total was 3Q15 at the end of an extended period of rampant imports. The “tri-state” (TX, OK, LA) region swelled by +4% Q/Q, while inventories outside the tri-state shrunk a nominal -<1%. Sorting through the various products, our survey shows that tri-state alloy stockpiles proved their ‘metal’ growing +6% Q/Q. With the exception of our recent quarterly adjustment (to fold in newly added OCTG yards) in 3Q17, this was the largest quarterly jump in alloy inventories since 1Q15. A recent spate of tubing imports was responsible for inflating tubing stockpiles this quarter. In anticipation of the 232 decision and the second Antidumping (AD)/Countervailing Duty (CVD) administrative review on OCTG imports from South Korea, tubing inventories rose sharply and strategically +17%, resulting in the largest hike we’ve witnessed Q/Q since the Chinese import surge back in 1Q09. The only decrease in inventories observed this quarter was that of carbon stocks, which saw a slight drop decreasing -<1%.

Meanwhile, the final determination of the anti-dumping case against Korean OCTG handed down April 11 that could have struck another blow turned out to be a non-event. So, for now, the only trade defense measure that has the potential to offer relief is that of the KORUS agreement.

While inventories are historically high there’s a number of reasons to remain encouraged at least in the short term. Barring any economic hiccups, summer in the oil patch looks to be one of all systems grow. To start with, the ‘Oiligarchs’—senior OPEC officials from the world’s biggest crude producing countries—met this past Friday to assess compliance to cutting crude production and reaffirm their commitment to achieving the rebalancing of the global oil market. This offers some insurance that WTI won’t fall off a cliff provided that the escalating trade dispute between the US and China doesn’t upset the apple cart or the oil cartel. The market is also waiting to see how the president will handle sanctions on Iran as the May 12 deadline approaches. With oil prices currently at three-year highs helping to bolster onshore OCTG consumption and the likelihood of OCTG imports being slashed as the date for the expiration of the Section 232 tariff exemptions (for Argentina, Australia, Brazil, Canada, E.U., & Mexico) draws near, the supply side is prepared to strike while the iron is hot.

For any parties banking on the benefits of the Section 232, gains could be short-lived if cost inflation and supply disruptions derail E&Ps’ best laid drilling plans. This is a decided concern with regard to the South Korean “KORUS” Free Trade Agreement that was drafted in lieu of the 25% tariff, where Koreans agreed instead to a quota that will reduce their OCTG imports to the US. As of yet there is no determination on whether the quotas will expire after a set time. The quota agreement means a significant volume of Korean upstream OCTG will not make it to the US this year. The same quota ruling also applies to line pipe and hot rolled coil among other metal products. If demand continues at a high level throughout the year this could wreak havoc on supply especially as domestic tubing capacity is greatly limited and much of the surface casing has been supplied by importers as well. One significant caveat: we still await a final decision on when the quotas go into effect and if they will be prorated. That makes a big difference.

What we do know (at least until the next U-turn) is that the OCTG market will continue to be in a state of flux until the dust settles on the 232. Between now and May 1 there will be a lot of jockeying for position as countries negotiate some sort of relief or country exemption to the 232. Further details can be found in our April Report.

And so, we come to the close of another month in the oil patch and the all ‘important’ question remains: how does this situation play out? Our money is on the ancient Chinese philosopher Lao Tzu who said, “Those who have knowledge don’t predict. Those who predict, don’t have knowledge.” ‘Nuff said.

Photo Courtesy Liquidity Services, Inc.

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