OCTG at Crossroads?
Baseball Hall of Famer and philosopher Yogi Berra said it best: "If you come to a fork in the road, take it!" And so we forge ahead into the second half of the year despite the occasional speed bumps and obstacle course we fondly call the oil patch.
Interestingly, “patchy” seems to be the operative word when it comes to describing current market sentiment. The paradox is that overall demand continues reasonably steady and drilling operations have remained resilient notwithstanding growing concerns in the Permian and the 232 looming large.
With freewheeling pipe inventories, OCTG prices stuck in neutral and escalating raw material costs causing consternation for welded suppliers, many view the 232 as the gift that keeps on ‘taking.’ Part of this equation was revealed in our Quarterly Report last month. The unpredictability of the 232 including the outcome of thousands of exclusion requests is weighing on the minds of suppliers wanting to unload inventory backlogs before the year’s end; many of whom seem more willing to wheel and deal. This in turn is curbing OCTG prices that have been essentially gridlocked since April. And six months into the year domestic pipe shipments are still taking a back seat to imports.
As we’ve discussed in recent Report’s there are many moving parts to the market in which we find ourselves; one that is simultaneously exciting, challenging and confounding. In times like these it helps to keep one’s wits about oneself, for this moment may prove to be the calm before the storm. Let’s not forget the country that has held the top spot for OCTG imports seven consecutive years running, South Korea, has a quota in place that limits its import tonnages for 2018 significantly and they’re close to filling this year’s quota now. Last year Korean OCTG imports were greater than 1MM st. Meanwhile, we’re forecasting consumption will rise by double-digits in 2018. I guess we don’t have to tell you that some parties will be impacted when the ship hits the fan!
And while there are still folks who believe other countries can make up the difference in tubing and surface casing this year, we’re here to tell you that most foreign mills view the 232 as a minefield and don’t want to risk ramping up only to have the goalposts moved. This is all to say deficits in supply of certain highly desirable imported mainstays can be expected by the fourth quarter and prices will rally to meet them.
We close out this month where the rubber meets the road noting that U.S. apparent consumption registered 23% higher than last year at this time and just shy of half of our consumption forecast for 2018. While we can’t promise a smooth ride to the finish line we can say there are enough bullish signals to suggest the market is on the right track.
Photo Equinor (formerly Statoil) Courtesy Ole Jørgen Bratland ©Equinor
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