2Q19 OCTG Inventory Analysis: A Calm Before the Storm or Smooth(er) Sailing Ahead?
The results of our exclusive 2Q19 Quarterly OCTG Inventory Yard Survey could be viewed as a beacon of hope for those who expressed trepidation about the outcome in our midyear market conversations last month. Turns out parties with an ear to the ground controlled inventories extremely effectively and managed to stem the tide from Q1 that could have easily rocked the boat this quarter.
While most of you know the ropes by now we’ll remind everyone that we host our exclusive quarterly surveys in order to measure demand for OCTG throughout the entire US supply chain, delivering the most accurate OCTG inventory updates in the oil patch so that our subscribers can better navigate the course ahead. This quarter’s survey (period ending 6/30/19), revealed that “prime” OCTG inventories in the L48 expanded by a “manageable” amount all things considered. The bulk of increases were posted in the mill/processor segment; concentrated mainly with processors. Hikes were recorded in all but one category throughout the tri-state. Alloy stocks saw the greatest build Q/Q in Q2. Carbon was the only product category registering a decline. Gains in the closely-watched tubing category were witnessed again this quarter.
The dampened levels of oilfield activity attributable to E&Ps continued commitment to capital discipline discussed last month in our June Report had a direct impact on the lower intensity of inventory builds and were especially evident in Oklahoma and West Texas this quarter. Lower import volumes Q/Q also played into shifts witnessed in the inventory mix this quarter. This was particularly apparent in the drop in carbon products; an import mainstay. Interestingly, tubing stocks were buffeted by twin forces in Q2: one that kept any potential build subdued and one that tempered the possibility of greater destocking. The two factors contributing to this situation were a modest drop in imports and a US DUC count that, despite a slight retreat in Q2, remains well elevated, respectively.
So, what might the Q2 stats viewed in tandem with our other proprietary quarterly metrics tell us as we cruise into the second half of the year? First, observing the sinking Q/Q permit metric makes it increasingly clear that a rise in rig releases is in store for the next five months. This doesn’t mean a rig count collapse is on deck but conforms with the consensus opinion that “flat is the new up.” This presumption arose in the wake of the WTI volatility that occurred in Q2 and quashed the likelihood for a second half activity rebound that may have otherwise come about. Our estimate for Q2 consumption also offers a less than buoyant probability that OCTG demand will improve much over the balance of the year. At the same time, if we review the depressed Q2 consumption metric for 2018, it could have proven foreboding but didn’t materialize as such. Even though that scenario is unlikely in 2H19, due to different oil patch circumstances Y/Y, we simply can’t rule out the possibility that this metric could continue flat or grow slightly. Meanwhile, we’re keeping a close watch on HRC as mills attempt to shore up prices with a rash of recent price hikes. While this could prevent OCTG prices from drifting down M/M through December, at the moment we don’t see this torpedoing any forecasts for the next six months.
In closing, we view the results of the 2Q19 inventory survey as setting the OCTG market on an even keel especially given the somewhat murky conditions we’re facing. Inventories of tubular goods may not yet be in a safe harbor, but they’re certainly better positioned to weather any challenges that might arise in the remaining months of the year. And that mates, is as close to “smooth sailing” as one could hope to hear. .
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Photo Courtesy Boomerang Tube, LLC
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