Natural gas drilling has fallen to historic lows this year on the back of depressed prices, and potentially warmer winter weather is leaving energy tubular suppliers unsure about the traditional winter pickup.
Natural gas drilling has fallen to historic lows this year on the back of depressed prices, and potentially warmer winter weather is leaving energy tubular suppliers unsure about the traditional winter pickup.
The number of drill rigs running in the United States fell in early November to the lowest level since April 2002, while Canadian
drilling activitiy slid compared with the last week of October.
Energy tubular tags also are continuing a downward spiral due to an inventory glut, even as some in the supply chain were hoping for a reversal as oil majors consider their capital and procurement budgets for next year.
We fell off the cliff (this year) and were going to have to crawl our way back, one Midwest distributor source said. For now, were just bouncing along the bottom.
These sentiments were expressed as the oil country tubular goods (OTCG) industrys search for a bottom continued in October as prices fell further while sentiment remained stagnant.
OCTG averaged $1,261 per ton for the month, according to from Pipe Logix LLC, down 3.6 percent from $1,308 in September, the lowest level since at least 2007. Electric-resistance welded OCTG fell 3.9 percent to $1,148 per ton from $1,194 in September, and seamless products slipped 3.3 percent to $1,375 per ton from $1,422, Pipe Logix data show.
Only two productsboth larger-diameter seamless K55 casingresisted the downward price pressure. The other 38 products tracked by the Tulsa, Okla.- based company saw price decreasesnine by 5 percent or more.
While unsold inventory is shrinking, 90 percent of distributors in October expected average sales price to decrease by the end of the year, according to Pipe Logix. The oversupply may be lessening, but demand remains weak with the rig count expected to average below 800 in October, Pipe Logix manager Kurt Minnich said in a statement.
The gap between average domestic and imported product prices shrank 9.2 percent to $188 per ton from $207 in September, according to Pipe Logix.
Oil exploration and production companies exhausted their budgets as they entered the fourth quarter, OCTG supply chain participants said, with companies expecting a slow recoveryif anyduring the first quarter of 2016.
When the oil companies get budgets back, youll start seeing a little bit more activity, one Houston-based trader said. Theres some tepid optimism for the first quarter ... people are talking about some orders. (At least) its not like a couple of months ago, when no one was even talking about replenishing inventory.
Despite the chatter over 2016, OCTG suppliers still face a significant inventory oversupply they need to get rid ofat any cost.
Were selling as much inventory as possible, which is very difficult to do right now, a second Houston-based trader said. Some of us are taking a $400-perton loss on large orders just to free up cash flow and get rid of inventory.
The larger the order, the more likely suppliers will dig into their own pockets to move product. If someone wanted to buy large enough truckloads, they could call any numbers, a Southwest distributor source said. The supply side, service side and (exploration and production) side are all trying to cut costs at once, so everything is pushing prices down. The oversupply is still way out of balance."
While line pipe, especially larger-diameter product, has shown some price resistance, the same anxiety over inventory
and pipeline project budgets is undermining pricing confidence in the more commoditized mid-sized market.
Were now asking, Do we make deals now or wait three weeks? The downward pressure is definitely continual, a Northeast
distributor source said. Were like a cat chasing our tail. Were our own worst enemies.
Line pipe players are following OCTGs lead by shedding inventory where possible and keeping a wary eye on upstream and
midstream firms in the fourth quarter.
Were beginning (to notice) some failures, one southern distributor source said. And well see it in rapid succession. Those (failing) oil companies are going to make the fourth quarter as ugly as they can make it.
Its all about supply and demand, a source at one oil country tubular goods (OCTG) mill said. If we see spikes due to specific weather and gas is hard to store, we will see demand pick up and drilling increase.
Unfortunately for pipe mills, the upcoming winter is forecast to be just the oppositewarmer temperatures from El Niño and abundant gas supplies that are already straining the countrys storage capacity. Weakness in gas pricing is a direct influence on gas drilling and therefore OCTG from us to the market, the mill source said.
The El Niño warming of Pacific waters has made the futures market apprehensive about natural gas prices this winter, according
to Samuel J. Andrus, senior director of North American gas at Englewood, Colo.-based IHS Inc. Historically, there has been a wide spectrum of weather outcomes resulting from an El Niño, so it is not a given that North America will experience a warmer-than-normal winter in total, he told AMM via e-mail. Other atmospheric conditions can counteract or modify how the El Niño impacts national weather. But the futures markets are pricing in the risk of a future excess supply situation and driven, to the extent possible, near-term market adjustments to avoid such future excesses.
A warmer winter promises declining rig counts in the short term as the supply glut continues. The U.S. Energy Information Administration (EIA) expects a 6-percent decline in residential natural gas consumption this winter vs. a year earlier.