If the market becomes bullish, the rigs that come back first may still mean weak demand for tubular products even as drilling activity ramps up.
Falling energy prices have gutted global markets early in 2016, as benchmark crude oil prices trended to 12- and 13-year lows to start the year and the fallout reached past commodities into the wider financial markets.
The rig count crashed below the 600-rig total in the week ending Feb. 5, a key benchmark for gauging steel pipe demand.
While the bottom appears in sight, a rise in the rig count may not actually signal recovery for tubing products, as the number of drilled but uncompleted wells grows.
The pipe is already in the ground, Nicole Leonard, project manager at Denver-based Bentek Energy LLC, told AMM via e-mail. Many of the wells that will support oil production in 2016 have already been drilled. I would not be surprised if the rig count fell below 600, she said two days before reports confirmed the count had done just that.
According to Baker Hughes Inc., U.S. oil and gas rigs totaled 571 by Feb. 5, split between 467 oil rigs and 104 natural gas rigsthe lowest total since summer 1999.
If rig counts are still being cut, this is a reflection of the reduced (capital expenditure) plans oil and gas producers have been announcing over the past six months, Kim Leppold, an analyst in Metal Bulletin Researchs tube and pipe group, said.
A further drop in rig counts indicates further drilling rate cuts and reduced steel pipe demand, namely oil country tubular goods and gathering line pipe. This is already the worst market many have ever experienced.
Recovering from this market will not only require rigs, but the right kind of rigsnew operations in unconventional plays. That combination could be hard to find since exploration and production companies have committed to cutting costs by drilling wells and capping them. As a result, if and when the market becomes more bullish, these rigs will be the first to come backwhich means weak demand for tubular products even as activity ramps up.
With the inventory of drilled but uncompleted wells, producers have to drill significantly less, if at all, to maintain production or grow, Leonard said. This year, we expect to see producers going back to this inventory, completing these already drilled wells and placing them into production in order to maintain their output.
Those rigs that are operating are either under long-term contracts or operating to hold leases, she said.
While analysts see the rig count bottom in sight, if the lower-for-longer pricing environment continues, major shakeups could be in store for upstream energy companies.
We could see rig and lease contracts being broken as a result of insolvencyor desperation, Leonard said.
Meanwhile, steel is enjoying renewed optimism on the prospect of coil and sheet price increases, as well as strong growth indicators from automotive and construction industries. However, the increase is not safe from crude oils turmoil.
For instance, distributor selling prices for oil country tubular goods (OCTG) opened the year with a price dip, but sentiment rose slightly amid favorable inventory data.
Average OCTG prices fell to $1,176 per short ton in January, down 2.2 percent from $1,202 in December, according to Tulsa, Okla.-based Pipe Logix LLC. Electric-resistance welded product slipped 2 percent to $1,070 per ton from $1,092 while seamless items skidded 2.3 percent to $1,282 per ton from $1,312 in the same comparison.
However, the Tulsa, Okla.-based company recorded an increase in its distributor sentiment index, to 35 from 33. While any number below 50 indicates a contracting market, the oil and gas industrys continuing efforts to lower inventories is starting to pay off.
December OCTG shipments in the domestic market were estimated to be 114,000 tons, down 81.2 percent from the 607,000 tons shipped in the same month a year ago, according to Pipe Logix. The decline in shipments exceeds the 62-percent decline in the rig count during this period, causing inventories to decrease, Pipe Logix manager Kurt Minnich said in a statement.
Falling oil prices can have positive and negative effects on steel, Leppold said. But in the (United States), the negative is outweighing the positive.
Across all products, the steel industrylike most manufacturing sectorspays lower freight and fuel rates as a result of lower oil costs.
In that way, most steel players can leverage the effect of oil on their cost structures to use the low prices to their advantage to reduce costs, she said. However, the clear losers in this are energy tube producers, especially those that make oil country tubular goods (OCTG) and line pipe.
If your demand is going down while your suppliers are increasing their prices, making pipe just became that much more difficult, Minnich said.
Supply, not demand, will continue to drive the steel pipe market even as other products, particularly hot-rolled coil, push for increases.