"It is far better to foresee even without certainty than not to foresee at all," ~Henri Poincare, author of “The Foundations of Science.” With a greater line of sight to the year-end and a better grip on the impact of the 232 we thought it would prove prescient to revisit our thinking on OCTG pricing for Q4 and into 2019 as the E&P forecasting season is upon us.
The results of this month’s distributor spot market pricing survey made it clear that the 232 won’t add near as much to the bottom line as most were expecting—at least in 2018. And the meager increase M/M won’t dent operator pocketbooks as much as it will the morale of the supply prognosticators but it does point to pockets of underlying strength in the market. The bigger surprise for most is tubing’s unyielding drag on the composite price at this point in the year.
So why the upset? Part of the blame can be aimed at copious amounts of pre-232 inventory. Our exclusive 1Q18 Inventory Yard Survey (April Report) showed a record hike in quarterly tubing inventories: the largest gain we’ve witnessed Q/Q since the Chinese import surge in 1Q09. That was followed in 2Q18 with another healthy increase—not a record, but nothing to brush aside when you consider the volume of tons in relationship to the lighter weight of the material. The other part of the equation can be found in the prolific oil-producing Permian where the number of DUCs almost doubled in the last year. The EIA reports that total DUCs jumped to 3,470 in August, up 32% from January. This run-up in DUCs comes as a result of multiple constraints: trucking, sand logistics, labor, fresh water sourcing and pipeline capacity (a setback until 2H19) among them. With well completions deferred in the mother of all shale basins, tubing demand was destined to take a hit. But not forever. Let’s remember that tubing has been a mainstay of the import market and few domestic mills have been incentivized to produce it. Ultimately, the convergence of tightening inventories, crimped imports and lack of domestic supply in the case of certain items will show up on the books.
All things considered, we don’t see a meaningful increase in the composite price index before next year. With elevated inventories, Capex budget exhaustion, moderating raw material costs and year-end tax considerations top of mind we don’t expect to see prices improve much by December.
Readers have suggested it’s never too early in the year to offer a preliminary forecast for 2019; and thus we go into considerable detail in our September market intel. We will revisit our forecast again when we organize our November Report and tender our read on the metrics that matter for the coming year.
Taken as a whole, the 232 offers the domestic OCTG market a greater opportunity to profit in 2019. On the flip side, there’s the chance that increased domestic capacity, production and improved utilization rates along with lower input costs will keep prices in check. These two opposing forces will battle it out as long as the 232 as we know it today is in place.
We end our editorial this month the same way we started, with a quote that pretty much sums up the present situation based on the unpredictability we’ve experienced in the oil patch this year. Simply put, “The future isn’t what it used to be!”
Photo Courtesy Tenaris