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ENERGY “At $60 a barrel of crude, it’s hard not to make money”

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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 decrease slightly.

The drill rig count is the primary indicator OCTG analysts follow, along with oil and natural gas prices.

"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 2007.

"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 said.

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 recently."


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