With strong energy prices and demand, the
U.S. market for oil country tubular goods remains stable, but
some analysts argue that increased import penetration and signs
of softening in drilling activity could see prices flatten or
The drill rig count is the primary indicator
OCTG analysts follow, along with oil and natural gas
"What's driving it is activity in the oil
patch," said Joerg Bongers, vice president of Preston Pipe
Report in Kemah, Texas. "That's all there is to it."
The number of active rigs continues to rise,
and oil and natural gas prices remain at high levels, albeit
slightly lower than those achieved in late 2006 and early
"Fluctuations between $60 and $70 a barrel
(of crude oil), it's pretty hard not to make money at those
prices. It's not close to levels where you'd want to stop
producing," Andrew Leyland, a senior metals analyst at Metal
Bulletin Research, London, said. "If prices are above $40 a
barrel, you can produce oil almost anywhere you want."
But while the rig count is still rising, it
isn't keeping pace with the torrid growth rates seen in recent
years, said Kurt Minnich, a manager at Spears & Associates
Inc., Tulsa, Okla., which publishes an oil country tubular
goods pricing report for Pipe Logix Inc. "The growth in the rig
rate has slowed and kind of flattened out."
High prices for oilfield services might have
discouraged some new drilling, especially with increasing rig
rental costs cutting into oil company margins, analysts said.
"There's been a shortage of rigs and a shortage of skilled
crews," Leyland said.
Another key factor affecting the OCTG market
is imports. The Chinese government might be trying to cut back
on exports of low-end steel products from smaller mills,
Leyland said, but OCTG products are considered to be high-value
products by the Chinese and as such the government is still
encouraging producers to export. "The Chinese pipe is so much
cheaper than the domestic-produced material, they can bring it
in almost at the cost of raw material in the U.S.," he
OCTG imports from China totaled 750,000 tons
in 2006, more than quadruple the 180,000 tons imported in 2004,
Minnich said. "That obviously puts some downward pressure on
pricing, especially on the kind of pipe they provide, which
tends to be smaller diameter and lower grade."
Imports are especially hurting U.S. producers
of welded pipe, which generally is used in shallower on-shore
drilling projects, Bongers said. Sturdier seamless pipe, more
commonly used in offshore projects where drilling is deeper and
pressures and temperatures are more extreme, has been less
affected by imports, he added.
But while imports have increased, the
situation hasn't reached a crisis point that might spark
government intervention, Minnich said. "There's nothing to
indicate the domestic industry is hurting right now, not when
companies are being acquired for the premiums they have been