The OCTG ‘Space’ 1Q19: The Current Frontier
While visual evidence of a massive Black Hole made headlines recently, we’re happy to report you won’t find any black holes in OCTG inventory metrics due to our exclusive quarterly Inventory Yard Surveys. This breakthrough is credited to our publication’s founder, Duane Murphy, who decided 33 years ago it was high time to resolve this gap and went about the laborious task of doing exactly that. The gravity of his work cannot be underestimated especially when you consider our inventory results are not the product of guesstimates like all others. To that end our computer model cranks out data points collected from over a hundred pipe yards throughout the supply chain that help us provide accurate and essential insight into the metrics that matter.
Our 1Q19 yard probe of the US supply chain revealed that “prime” OCTG inventories in the lower 48 expanded in the period ending 3/31/19. The bulk of increases were reported in the mill/processor segment; concentrated mainly in the processor category. Much of what we witnessed with regard to the increases can be ascribed to the reset in import quotas, not to mention the decline in WTI crude prices that surprised to the downside in 4Q18 about the time 2019 budgets were being considered. Reasonable hikes, by most measures, were recorded in all but two categories throughout the tri-state (TX, OK, LA). No surprise many processors cited a pickup in inbound activity; much of it imported goods. Greater detail and analysis on our recent survey and other contiguous data points can be found in this month’s Report.
What do mounting inventories signal and what do they mean for key oil patch metrics like consumption and months of supply? More often than not inventory builds are unwelcome, which is why suppliers do what they can to keep them in check. Increases in inventory can be interpreted as a signal of weaker than anticipated demand (the bad) or demand that is expected to grow in the future (the good). May sound basic but there’s more. In addition to examining the raw size of product inventories, studying trends in months of supply (trickles down from inventory) offers clues to the health of the market at any given time. This metric illustrates how many months it would take for the current inventory of OCTG on the market to sell given the pace of sales. It also plays into whom the market favors. Lower inventory levels are more favorable to sellers and prices while higher inventories typically favor buyers looking for better deals. Thus, an understanding of inventory levels not only provides insight into product tightness and surpluses it is also indispensable to knowing when to time buys.
So where is the market today and how does it bode for Q2 and beyond? Current inventory months of supply is slightly leveraged toward buyers. This metric has edged up over the past quarter but still remains in a relatively comfortable place provided the market doesn’t sour in Q2. Consumption for Q1, while hardly ‘over a barrel,’ did succumb to the downward forces on WTI in 4Q18. Imported shipments burst out of the gate in January and have vacillated ever since but are expected to strengthen as we move farther away from the crude price sucker punch in Q4. Many domestic mills, buoyed by an absence of raw material cost constraints, are reporting steady but plodding sales this quarter in anticipation of improving crude prices. This combination suggests another quarter of inventory expansion ahead, an event that shouldn’t be problematic provided consumption moves in lockstep. And although there is plenty of market skepticism in the oil patch segueing from Q2 to 2H we believe the integrated Permian oil “majors” hold the keys to OCTG consumption this year.
Even with a more bullish outlook, there remains one nagging marplot and that is tubing. While it may sound like old news and hyperbole considering spot market prices for the category have been getting hammered, we still caution buyers of the potential to be sidelined if tubing supplies dwindle in the latter part of the year when completions activity reaches a zenith. With the analysis provided in our April market intel you’ll understand that it doesn’t take a rocket scientist to predict what might lie ahead.
If the stars are in alignment 2H19 is likely to be “one small step” for OCTG consumption. While it’s not a giant leap, it’s not a mission impossible either.
Photo Courtesy CTAP, LLC
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