What’s in the Cards for OCTG in ’23?
Each November we publish our annual OCTGPS wherein we examine numerous oilfield metrics to determine what might be in the cards for the coming year. Will the deck be stacked in favor of or against the OCTG market in 2023? Here’s our read of the hand that may be dealt to this sector. Let the games begin.
When looking at the composition of OCTG consumption there’s no better place to begin than by examining commodity pricing, even though what used to be the jumping off point for drilling activity seems to be the nodding off point today. This is to say, today’s oil and gas prices are no longer the ace in the hole for US drilling they once were. Granted no one is prepared to show their hand this early in the budgeting season but the common thread throughout the austere E&P C-suite scripts is “muted prospects for production increases” in 2023. Our simplistic translation for the purpose of this examination is, “less is more.” Thus, we’re modeling a slight uptick in the average rig count. However, if inflation eases, labor issues diminish, interest rates moderate, and commodity prices remain elevated (all possibilities), the odds of improving this metric will be greater. The wild card in D&C activity for 2023 is the impact of interest rates on private operators that have supersized the increase in Capex and production over the past couple of years. This factor could determine the extent of capital they’re able to deploy and the degree to which they could ratchet up their production and accompanying OCTG spend.
Another contributor to inflation and consideration before the ‘great decoupling’ of late 2020, has been feedstock prices, which are now coming off historic highs at >60% off the average price back in September 2021. And prices for No 1 busheling scrap have fallen ~39% since June. As the supply of flat-rolled materials increases with oncoming capacity, it’s a good bet that prices will be further pressured. The only thing that has kept these raw materials from being relevant to pipe pricing has been the singular seller’s market that OCTG has occupied for the past year and a half. Also, playing into the wide range of potential outcomes for OCTG in 2023 are imports. We go into great detail in our November Report.
A positive for the OCTG market moving forward is that U.S. Steel reached a tentative four-year contract agreement with the United Steelworkers (USW) earlier this month. Conversely, the threat of a national freight rail strike that strikes at the heart of all supply chains at the most consequential time of year has been pushed back to early December.
All this provided guidance for our apparent consumption forecast for 2023: how it plays, who holds the cards and what could shuffle the deck. And, far be it from us to dismiss pricing, perhaps the most pressing issue of all right now as well as the most convoluted of all prognoses. That said, we weren’t shy about sharing our comprehensive analysis on this subject either.
As we look ahead to 2023 we’re reminded, no matter what’s in the cards for the coming year; life isn’t about holding all the cards but playing all those you hold well. Game on!
NOTE: Our monthly blog posts offer a slice of the content we publish in The OCTG Situation Report® every month. To subscribe and/or request a complimentary copy of our Report for review please visit: https://www.octgsituationreport.com/subscribe
Photo Coterra Energy Courtesy ©Jim Blecha, www.oilandgasphotographers.com