2019 OCTG Forecasts: Merry & Bright ... or Ho-Hum?
’Tis the season and it’s tradition for us to start it by ringing in our forecast of all things OCTG for 2019. As we began checking off our list of oilfield indicators in early November it appeared that our projections, starting with WTI, would be of good cheer. We were midway through our predictions when the White House threw in a lump of coal—a reprieve from Iran sanctions for eight countries—roiling oil markets on concerns of oversupply and potentially dashing our merry and bright expectations for OCTG in the new year.
Whatever the case, the newfound volatility in oil prices forced us to reconsider a few metrics since a ho-hum oil forecast could slay our otherwise optimistic outlook. In terms of OCTG consumption, oil has been the gift that kept on giving for the past year. On December 6 and 7 OPEC plans to meet to determine where to go from here but based on the outcome of an earlier meeting on November 11, Saudi Arabia announced plans to cut their production in December; a move that was seen as a measure to halt the impending market slump. In order to proffer a forecast we are working on the assumption that the waivers issued to the eight countries that purchase Iranian oil were timed for the midterm election cycle, will be limited in scope and will ultimately result in stifled Iranian oil supplies longer term. With that said, we’re going to trim our more bullish oil price average for 2019 and hold it closer to ~$60/bbl. Fortunately, operators are generally better prepared for $55 - $60 oil than they were four years ago and US producers who locked in oil hedges for their production in 2019 are the least concerned. Our expectation for nat gas is in line with many consensus views, between $2.85 - $3/MMBtu; neither feast or famine for either commodity. When it comes to E&P Capex and how it plays into OCTG consumption, most would say, “the more the merrier.” On that note, tidings from Evercore ISI suggest North American operator budgets will rise ~+15% Y/Y while Cowen & Co recently adjusted their original +12% forecast for US spending to “flat to +15%” weighted toward 2H19 with the potential to increase if WTI shows greater stability and when Permian constraints are lifted. Both are based on WTI at $60/bbl.
During their Q3 earnings call, Jeff Miller, Halliburton CEO, reported they were already seeing OFS demand rebound for crews when budgets reset and completions programs hit full steam in 2019. Oilfield research firm Infill Thinking believes that well completions in the US are on track to be ~16K this year, heading to ~19K in 2019, an increase of +19%. These mostly generous declarations should help to goose the rig count; our view is an average of 1,088 (+6% Y/Y) versus the present year at ~1,026 (+17% Y/Y). All of these metrics are supportive of further OCTG consumption growth in the coming year. Our forecast is provided in our November Report.
We analyzed OCTG pricing trends for Q4 into 1H19 in our September Report. Hot rolled coil remains elevated currently but is likely to average somewhat less per ton than 2018s annual average in 2019. However, if the US Mexican Canadian Agreement goes into effect in 2019 and 232 tariffs are lifted for either country more uncertainty could ensue.
While predictions that tubing supplies would tighten between Q3 and Q4 didn’t materialize we still believe that they might. First, the prospect of a downshift in the Permian had many operators building DUC inventory, which is likely to result in accelerated completions activity in 2019. This, of course, provided WTI prices stay at or above $60/bbl. When considered with the OCTG quota on South Korea, from whom 63% of the tubing market was supplied in 2017, along with the likelihood of stronger penalties stemming from the second administrative review of the antidumping order on their OCTG imports, the threat of supply tightness becomes more real. Added to this is the significant draw on tubing inventories we noted in our Q3 Inventory Report, a hint that some upstream operators wanted to jump ahead of the fray. We will watch this metric closely again when we publish our 4Q18 OCTG Quarterly Inventory Yard Survey results in January 2019.
There may not be a gravy train in sight for OCTG next year but 2019 certainly won’t be a turkey either. And for that we can all be thankful.
Photo Courtesy ©Encana Corp. All rights reserved.
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