No Big Bump Forecast for Oil or OCTG

But analyst Christopher Plummer, managing director at Metal Strategies, Inc., West Chester, Pa., offers a flat forecast for the energy market until the second half next year. “There’s a bit too much oil in the market in the U.S. and around the world right now,” he said.

Metal Strategies forecasts a modest decline in the rig count heading into early 2018, followed by a pickup in drilling activity later in the year. “We are expecting the average rig count next year to be about the same as 2017. We see the first half weaker, then nice improvement in the second half, continuing into 2019,” Plummer said. Declining investment around the world will lead to lower oil and gas output in first-half 2018, allowing U.S. oil drillers to increase their activity in the second half, he explained.

Plummer noted that since 2014, many players have reduced their breakeven costs significantly by shifting to “pad sites” on which multiple wells can be drilled from a single rig. The current percentage of pads, which can account for up to 30 wells per rig, is about 70 percent. While the rig count may be up, the number of wells drilled in the U.S. declined by nearly 19 percent in the first eight months of this year, which shows the continuing financial strain on oil and gas drillers, Plummer said. Lenders used to base loans on production volume, but now expect borrowers to show a net profit. “Lenders are really constraining the availability of cash and investment dollars,” he said.

Most forecasters anticipate oil prices in the $50 to $60 range in 2018, which is “lackluster,” Plummer said. On the plus side, the decline in investment by energy companies around the world should open the door to increased drilling activity in the U.S. beginning in late 2018 and increasing into 2019.

But for at least the next six months, Metal Strategies sees flat to moderately weakening conditions. “For steel mills supplying hot rolled coils into the OCTG market, that’s the picture they will be dealing with,” Plummer said.

Did Section 232 Talk Boost OCTG Imports?

Despite the “lackluster” market conditions, U.S. imports of oil country goods have jumped by more than 230 percent and line pipe imports are up over 60 percent year to date, based on Commerce Department data. Imports’ share of the OCTG market is around 62 percent, well above the historical norm of 40 to 50 percent, said Rick Preckel of the Preston Pipe Report.

The reason is difficult to pinpoint, he said, but one possibility stands out. “There is anecdotal evidence that people brought in more imports in advance of some sort of action on Section 232. If you look at the timing of when imports are ordered and when they arrive, you can see it. September was the peak OCTG month this year, which fits right in with heavy ordering shortly after the April announcement of Section 232. However, we would have expected import levels to tail off if there were a significant amount of that happening, but we have not seen it,” Preckel added.

Written by Tim Triplett, Tim@SteelMarketUpdate.com