Will OCTG Buck 2018’s Advancements?
H-Town confirmed it knows the ropes as it played host to a Texas-sized A-list this month for the RodeoHouston Livestock show and the 38th annual CERAWeek where revelry met with a “New World of Rivalries”; the theme for the preeminent confab. Meanwhile, we put our own unbridled energy into rounding up all the stats necessary to prepare our yearly “state of the industry” Report: a comprehensive review of the metrics that matter in OCTG for the past three years. Typically, this analysis would be provided in February but the government shutdown delayed the year-end import/export data points that are needed to tally the annual stats.
Examining the year-end totals stacked side by side is always an enlightening exercise even though we live with the numbers daily. Two metrics that bode well for domestic OCTG health in the short-term are the drop in inventory tons and the improving domestic shipments outlook Y/Y spurred by the 232. Indeed, the Section 232 proved providential for most domestic OCTG suppliers by reining in imports for the first time in years: restoring balance and reducing import market share to the lowest point since 2014. Further underpinning the market, months of supply closed out December in a good place. This fact, in and of itself, could be viewed as a “Trojan Horse” if crude pricing rallied and operators responded in kind, but we won’t worry unless we see further compression in this metric when we complete our exclusive Quarterly OCTG Inventory Yard Survey next month.
We’ve been riding herd on market dynamics for 1H19 for some time now, devoting ample space to our thoughts in last month’s Report, so we dove right in with our updated full year OCTG outlook for 2019 detailed in our March Report. Our projections were built in large part on WTI crude pricing for 2019 that are mostly in line with consensus forecasts, ranging between $55 - $60/bbl versus the average for 2018 of $64.94/bbl. The drop in commodity price that suggests a corresponding contraction in Capex budgets and thus a dampening in drilling activity and OCTG spends further informed our updated forecast this month.
While this isn’t our first rodeo, forecasting OCTG spot market pricing for 2019 is fraught with difficulty due to the indeterminate issues discussed above. We’re somewhat less bullish now than when we approached this subject back in November. With imports surging back into the market, HRC prices averaging -15% under the 2018 average and suppliers aggressively defending their turf, prices are more apt to stagnate through June. The $64,000 question remains at what point does the ‘buck’ stop dropping? Will the OCTG distributor average reverse course if inventories continue to shrink? And what if crude prices surprise to the upside? The answer, friends, might just be blowin’ in the (Permian) wind.
Should WTI break $60 in the last half of the year and stabilize thereabouts, OCTG demand will rise to the occasion but there are still limitations on how much it can grow at that point. One of the concerns we’ve voiced many times is tubing supply and while tubing counts for less in terms of weight/consumption, less can mean more—in terms of headaches—if it’s not readily available when needed. Case in point: tubing imports receded a fair amount in 2018 and there’s still no clear replacement for potential tubing deficits domestically until 2020. The kicker could be that South Korean mills will reduce their exports further if they’re hit with higher penalties as expected when the final determination to the third anti-dumping review is announced this April. And there’s still the possibility that Mexico and Canada will negotiate quotas in order to come to terms with the new free trade agreement (USMCA). Fresh negotiations on steel are still on tap for Japan as well. With a resolution to the Permian constraints (pipeline takeaway capacity among them) expected in 2H19, DUCs are expected to be drawn down and completions could soar. This means one thing as deduced from our discussion above; tubing prices will follow suit. Higher prices and limited quantities could temper completions/buys from those outside of the super majors and major Permian players and that could cause a hiccup in demand to close out the year.
We know there’s a lot riding on our OCTG outlook and we’re also aware there are a lot of prognostications out there that are “all hat and few cattle.” While we can’t deny “it's tough to make predictions—especially about the future,” we’re proud to offer the most accurate set of metrics and independent thought-leading research in order to arrive at conclusions on which our readers can rely. And that folks is no bull!
Photo Courtesy Devon Energy Corp.
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