2Q18 OCTG Inventory Yard Survey: Who Turned Up the Volume?
Drum roll, please…the results of our exclusive quarterly OCTG inventory yard survey is here. The objective of this endeavor is always the same: to measure demand for upstream pipe throughout the supply chain across the lower 48. The question is, did 2Q18 end on a high note or were we left singing the blues? The answer is somewhat involved. A portion of our analysis that was published in this month’s Report follows. The key point is inventories ended higher than anticipated but shouldn’t be cause for concern—yet.
Q2 “prime” OCTG inventories advanced +6% in the most recent quarter with the bulk of increases driven by mill/processors beefing up reserves as a hedge against the 232. Total quarterly inventory tons this period ranked closest in count to inventories last seen in 2Q15. That was just after reaching the highest OCTG inventory volumes ever logged during 1Q15. A record build that followed on the heels of the oil market downturn and was exacerbated by an import surge in 1Q15, coupled with considerable quantities of domestic OCTG that continued after domestic manufacturers volumes reached their apex in 4Q14.
2Q18 offered a number of opportunities for historical comparisons. For starters, alloy stockpiles charged to the fore Q/Q. This was the largest quarterly jump in alloy inventories since 1Q09 when imported goods from China flooded the market. Domestic producers were also riding the high shipment tide leading up to that disconcerting state of affairs. The current alloy hike is the result of an acceleration in production from domestic mill/processors: a combination of domestically rolled pipe and heat-treated carbon imports. Inventories of casing also registered a hefty climb in 2Q18, posting the largest quarterly increase (outside of third quarter adjustments) since 2Q10 when the market was climbing out of the recession. Seamless products came in third on the list of big movers this quarter; the greatest Q/Q increase since 1Q09. Carbon materials were the only product that lost ground (again) this quarter, posting a nominal decrease in Q2.
We’ve laid out some of what took place this past quarter from a historical perspective now let’s use what we know to analyze what it means for the coming months. Inventory doesn’t occur in a vacuum, there are numerous factors that lead to the changes we report. The threat of the 232 decision (pre-March 2018) had the effect of fueling a resurgence of imported OCTG as well as lighting a fire under domestic mills that saw the potential for shoring up market share. All the while oilfield activity has remained steady, propped up by healthy commodity prices making it challenging to predict the impact on inventories heading into Q2. Throughout Q2 we’ve reported a “time out” of sorts relative to OCTG pricing. The apparent lull in buying has a great deal to do with advance purchases (pre-232) of pipe, which isn’t necessarily a bad thing. Buyers sitting on adequate supplies are averse to buying “high,” preferring to wait until the market acquiesces to their thrift, which is holding OCTG pricing hostage for the time being. Pipe mills possessing sizable inventories are particularly sensitive to fluctuations in the buying cycle as they are eager to fill available capacity. Meanwhile, average rig counts continue to crawl upwards but the slope of the rig count has begun to flatten.
All of these forces pressure suppliers to work even more aggressively to reduce inventories in view of presumed lower year-end drilling activity alongside exhausted Capex budgets and ad valorem taxes. Plus, the current delta between ERW prices and welded raw material costs (HRC) doesn’t incentivize domestic welded mills to add shifts. When you further consider the tons that will be eliminated from this year’s OCTG import totals, the potential for supply disruptions or marked drawdowns in inventory become apparent—and more amplified if commodity prices and oilfield activity continue strong. Clearly a mixed bag of possibilities at play for the back half of the year. Buyers beware!
If the projected Y/Y increase in US Capex and sustained $60+/bbl WTI forecasts hold true, chances are we’ll end the year on a good note in any case: music to our collective ears.
Photo Courtesy Vallourec
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