Will The 232 Rain On The Oil Patch’s Parade?
Maybe it’s the heat, maybe it’s the market but this month everyone in the oil patch seems to be fired up about something. Fortunately for us they’re talking; offering an insightful barometer of upstream confidence throughout the supply chain. Foremost among the “hot topics” is the Section 232, which shows no signs of running out of steam anytime soon. As it stands right now the EU, China, Russia, Mexico and India have all filed dispute settlement cases against the US for its 232 tariffs via the World Trade Organization. These are in addition to the retaliatory measures that have been brought forth by the same five countries. Other countries including Japan, Russia and Turkey have warned of potential retaliation but haven’t released formal documents. Congressional efforts to “gain authority” over the Section 232 decision will be discussed in a hearing set for June 20.
Meanwhile, our June confabs ran the gamut from the administration’s unpredictability to the need for mills to make hay while the sun shines. Most of the concerns boiled down to the inability of participants to plan ahead; leaving many in a quandary over the “optimum inventory” for the yearend. This month’s conversations also highlighted operators’ categorical resolve to live within budget and how OFS inflation could dampen activity.
Insofar as inventory levels are concerned, historically there has only been seven quarters that exceeded 1Q18 ending inventories. The record levels were recorded between December 2013 and June 2015 when two significant events converged to create a perfect storm: a tsunami of imports and the downturn. Current elevated inventories will serve as a buffer as the tide of imports is stemmed.
Our well ’versed’ responders were of the mind that pipe shortages in 2H18 will be few and far between due to the steady pace that’s allowing mills to ramp up capacity (where available) and build inventories in advance. Lack of domestic availability was behind the surface casing item that received the most mentions in terms of potential scarcity. Tubing as a category also received top billing but more so as it related to anticipated price hikes: again this is due in large part to the difficulty in domestic sourcing. Opinions were decidedly more mixed when it comes to pinning down a time for pricing increases. We discuss specifics in this month’s OCTG Situation Report.
When queried about issues outside of the cacophony of the 232 there was definitely a degree of bullishness from most parties. The overriding driver of positivity is the likelihood that worldwide oil demand will continue to rise provided there are no black swans on the horizon. With OPEC now more inclined to promote ‘higher’ for longer and international spending/exploration at historic lows, the global market is increasingly dependent on the US for oil. This should help sustain the crude rally over the next couple of years.
With that said, if you can’t stand the heat get out of the oil patch. For the time being, this market is piping hot!
Photo Courtesy EP Energy