“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 exclusive quarterly OCTG inventory yard survey is further proof of this fact. Our inventory investigation and analysis is the only one of its kind in the world and serves as a bellwether of OCTG health throughout every segment of the supply chain.
Zeroing in on the Outcome
Herewith we present the evidence leading to our determinations. 3Q18 presented a turn for the better offering a welcome break from the past six consecutive quarters of surplus supply. For the period ending 9/30/18, “prime” OCTG inventories contracted -4% throughout the lower 48. “Tri-state” (TX, OK, LA) OCTG inventories dropped -6% with the bulk of decreases seen in the mill/processor segment where stocks have been building for the past five quarters. OCTG inventories outside the tri-state region advanced +5% in Q3.
The Plot Thickens then Thins
Coming on the heels of a quarter where every OCTG category throughout the tri-state increased but one, we observed declines in all categories in Q3. Seamless stockpiles that have posted gains over the past four quarters retreated -7% Q/Q, welded products lagged far behind in destocking. The culprit? A lesser build in ERW materials over the quarter (both imports and domestic shipments) as well as the greater use of more seamless (premium) products for longer laterals. Digging deeper revealed stockpiles of alloy receded -5%—this after six consecutive quarters of sizable increases. Casing, which like alloy saw six consecutive quarters of gains, shrank -5%. Inventories of tubing that have remained stubbornly high ticked lower this quarter: -11%. Could it be end users are getting spooked by the drastic drop in tubing imports and buying before they’re left out in the cold? We’ll be discussing this in detail in our November OCTG Situation Report. In any case, our separate inventory survey of select distributors detected a nominal quarterly bump going into Q4. This finding—along with a small percentage build in E&P inventory ownership—confirmed our hunch that the bulk of the inventory draws in Q3 went downhole, providing a boost for Q3 quarterly consumption.
Our OCTG M.O.
So now you have some idea of the quarterly stats that we reported in our October OCTG Situation Report but here’s where it gets real and the real reason that accuracy in inventory matters. Because once we’ve collected all the surveys and input data from 125 OCTG yards throughout the lower 48 supply chain we can piece together the puzzle that allows us to provide readers with the most accurate measure of critical oil patch metrics: consumption and months of supply.
Cracking the Code on Consumption
Based on our thorough examination of Q3 inventory intel, we can now deduce that apparent consumption for the remaining months of 2018 will plateau, leading us back to our original (lower) consumption forecast issued in November of 2017. The reasons for this verdict are manifold. The most concise explanation is that six consecutive quarters of inventory increases—including the steepest quarterly hike since March 2009 in 2Q18—weighed heavily on consumption this year disrupting normal market trends. Despite diminished import shipments due to the 232 (-4% YTD compared to prior YTD); domestic shipments, while considerably higher YTD as of August (+36% compared to prior YTD), were somewhat muted Q/Q due to abundant inventory stockpiles reducing the need for restocking in addition to reports of moderately softer mill demand considering the level of activity in the oil patch. With one quarter left until the year’s end there simply isn’t enough time to mount a solid recovery especially when market participants are fixated on a combination of E&P capital austerity and notable budget exhaustion not to mention December 31 inventory targets/ad valorem taxes. All of these trickles down and pushes down on apparent consumption as is illustrated in the middle table on the last page of every Report.
Jumping to Conclusions
The operative word when it comes to consumption remains “demand.” No mystery there we suspect most would declare. The good news is that 2018 OCTG consumption is still expected to be up Y/Y. Further, we anticipate that the consumption growth that was constrained due to the facts presented in our editorial this month will be deferred to 2019 provided inventories continue to ease and commodity prices remain resilient, something we look forward to witnessing. Case closed...until next quarter.
Photo Courtesy U. S. Steel Tubular Services