’Tis the season, the time when we sift through stacks of data in order to provide some grist for the mill. Faced with lingering trade-related issues, global economic concerns and the general uncertainty heading into an election year there’s no sugarcoating the situation. Be that as it may, we herewith aim to separate the wheat from the chaff with the intention of serving you well into 2020.
We’ll commence our thesis by crossing off “feast or famine” from the list of possible scenarios for OCTG in the coming year. The reality moving forward is more about establishing the ‘newest’ normal: a middle ground of sorts where everyone can attempt to secure a piece of the pie.
When considering the composition of OCTG consumption let’s begin by examining commodity pricing, the jumping off point for drilling activity. This also serves as the baseline for our forecasts. The US benchmark for oil is expected to stay in the $50/bbl range—the Energy Information Administration (EIA) forecasts WTI crude prices will average $54.50/bbl in 2020 compared with the YTD/October average of $56.78. Likewise, nat gas prices are projected to average $2.48/MMBtu, down 13¢ from the 2019 average. Metrics, when viewed together, that aren’t so much hard to stomach—just uneventful and underwhelming.
This brings us to E&P Capex, which oils the wheels of this industry. Consensus opinion at this early juncture suggests muted US onshore spending will be lower Y/Y as operators forge ahead minus their Wall Street safety nets due to The Street's lack of appetite for energy. This cautious spending scenario plays into the rig count which, by our estimate, will fall Y/Y as well. In the near term (one year out), demand for rigs will hinge solely on industry economics that are presently lackluster. After slicing and dicing all of the many metrics that contributed to our prognosis outlined here we also tendered our forecast for 2020 OCTG consumption. Complete details for each of our 2020 forecasts are available in this month’s market intel.
All this brings us to the “bottom line”: how will this trickle down to OCTG pricing and will the new reality bite? While demand has been known to recover seasonally (at first of year) imports will also increase (albeit to a lesser degree Y/Y) in the first quarter as quotas are reset. This could pressure prices even if demand improves modestly.
And while raw material costs often recover in colder months that’s not a given this winter (through 1Q20). The market is oversupplied and there’s more capacity on the way from mini-mills incentivized from the giddy early days of the Section 232. The unprecedented level of new steel-making capacity at a time of limited or minimal demand growth has been coined “Steelmageddon” and even deemed worthy of a trademark by Bank of America Merrill Lynch. While this will all take time to materialize the threat of a “Sheet Tsunami” hangs over the market. The likely outcome is consolidation or business closures. Of course, lower capacity can mean higher steel prices but high inventories are likely to keep a lid on potential increases. To conclude, our call is for OCTG prices to be adrift.
So, while the OCTG market may not be “cooking with gas” in 2020 the outlook for the oil patch isn’t a recipe for disaster either. And for that we can all give thanks.
NOTE: Our monthly blog posts offer a slice of the content we publish in The OCTG Situation Report every month. For a complimentary copy of The OCTG Situation Report for review please visit: https://www.octgsituationreport.com/subscribe
Photo Courtesy Apache Corporation
©Jim Blecha, www.oilandgasphotographers.com