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A look back to see what’s next for OCTG

Apr 30, 2013 | 08:00 PM |

Tags  OCTG, natural gas, oil, steel prices, drill rig,

At the start of the new century, there were few signs that the oil country tubular goods (OCTG) market was about to do something historic. But a remarkable growth cycle started about a decade ago, fueled by technological innovation and increased energy demand. Although the Great Recession slowed that growth, the OCTG market rebounded more quickly than other sectors. Some believe the market may be approaching a threshold moment as gas, oil and steel prices and supply-and-demand issues present new challenges. Several factors, shown here in a series of graphics, play a major role in the direction of the market.

Some states, such as Alaska, Pennsylvania and Texas, have long experienced high demand for energy and drilling operations. But for others, energy booms have come somewhat more recently. A good case in point is North Dakota, which has reaped the benefits of sitting on top of the Bakken shale, a huge reserve of oil and gas. OCTG suppliers have been selling drilling products to companies at work near the Canadian border for several years.

Natural gas drill rigs were responsible for much of the growth in the OCTG market during the first few years of the new century. But the growth line has flattened out lately, and the rig count has been falling for about two years. However, natural gas remains a popular form of energy, and analysts believe that the development of new extractive technologies will help propel the sector back into growth.

The oil sector has actually been able to return to its pre-recession levels of production, thanks in part to a boom in deepwater production as well as the use of horizontal drilling techniques, and demand for tube and pipe products has risen in tandem. Political pressures for U.S. energy independence also have pushed up demand.

Oil vs. gas
Steelmakers watch the relationship between oil and gas drill rigs with interest. Generally speaking, increased demand for oil rig products tends to offset a drop in gas rig demand. Perhaps this back-and-forth movement reflects the supply-and-demand price curve in the energy market. However, some in the tube and pipe sector are worried that the OCTG boom may be leveling out and that the increase of the proportion of oil vs. gas rigs is a sign of the boom’s end.

Gas prices
The price of natural gas affects how much investment is made in drilling. High gas prices a few years ago helped fuel the OCTG boom of the mid- and late decade. As gas prices have fallen, so too has the drill rig count. Oftentimes, pricing trends are more important to investors than specific price levels.

Steel prices
Import trends can have a major effect on steel prices. A number of imported steel products, particularly energy tubulars from South Korea, have been priced below domestic material for some time, pushing down domestic prices and making OCTG production potentially less profitable.

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