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Energy surges

Jan 30, 2017 | 11:50 AM | Fastmarkets AMM staff

A recent surge in oil rigs may signal a return to higher production levels, which in turn could lead to increased orders for steel products, while at the same time the new Trump administration is seen as potentially lifting line pipe, and OCTG, according to energy experts, industry analysts.

A n rnergy is flowing through the outlooks of some in the oil country tubular goods (OCTG) sector to start 2017 after weekly oil and gas rig counts in the U.S. reached and averaged more than 600 throughout all of December and January, the first time that had happened in a year.

“Not all news is bad, because North America at least since a couple of months, we’ve seen a change in trend,” Philippe Crouzet, chief executive officer of Vallourec, said in a recent earnings call. “We are experiencing positive trends in North America but to be honest so far that the only regional world where we see market recovering.”

Whether by coincidence or not, some of that upward movement occurred as Donald Trump prepared to move into the Oval Office, and also as recent production-cut agreements may have signal a quicker rebuild in domestic production.

The Trump presidency will probably boost domestic oil drilling activity and stimulate demand for energy-related steel goods, but the gains may arrive more slowly than the industry expects, according to analysts.

During his campaign, Trump emphasized that he would streamline federal regulatory approvals for energy projects, including drilling and new pipelines. With Republican majorities in charge of both houses of Congress, the president-elect has a somewhat clear path to achieve that, according to Kimberly Leppold, senior analyst with Metal Bulletin Research.

“It definitely should be positive for our domestic oil and gas production,” Leppold told AMM. “Republicans tend to have a more fossil-fuel-friendly platform than the Democrats do.”

Some producers say they already have been seeing improvement, some of it dating back to even before the election.

“Improving results for the American division also reflected growth in the US oil and gas market, which is expected to continue,” said TMK Ipsco chief executive officer Alexander Shiryaev in an earnings call. “With the global oil market expected to come into balance by mid-2017, the company anticipates the gradual recovery of the North American rig count and pipe market, which started in 2016, to continue subject to oil price growth.”

“As far as the North American market is concerned, obviously, demand is growing. We see the rig count increasing week after week. And we expect this to continue in the coming months,” Crouzet said. “I think my comment is more to make everybody aware that, yes, the volumes are picking up in North America. Yes, we take full advantage of that, but I want to insist on the fact that the pricing situation remains tough there and very tough on many markets and we’ve not addressed that so far.”

In addition to some optimism from tube and pipe producers, some analysts also say there could be a rebound this year in the energy tubulars market. The number of active U.S. oil and gas rigs stood at 659 during the week ended Jan. 13—the second-highest number since Jan. 8, 2016; the largest number since then was earlier this year, at 665 for the week ending Jan. 6, according to Baker Hughes Inc.

After the Organization of the Petroleum Exporting Countries (OPEC) secured more support for global production cuts late last year, West Texas Intermediate crude oil futures rose above $53 per barrel in December, their highest level in over a year.

In addition, OCTG and line pipe prices rose sharply in winter as U.S. drilling expanded and the cost of steel inputs soared. And prices for energy tubulars may be pointing higher still, sources said. Market participants voiced concerns about the availability of in-demand sizes, as mills may not expand production quickly enough to keep pace with the surging U.S. rig count and looming potential trade actions could limit the availability of imported goods.

In fact, TMK Ipsco raised prices for oil country tubular goods (OCTG) and line pipe by as much as $125 per ton effective mid-January.

The increases, which are “in consideration of the market situation,” apply to new quotes for all sizes and grades, the Houston-based company said in a letter to customers Jan. 11.

Welded and seamless OCTG casing and welded line pipe have been raised by $85 per ton, TMK Ipsco said. Welded and seamless OCTG tubing and seamless line pipe have moved up by $125 per ton.

Vallourec USA Corp. also boosted prices for oil country tubular goods (OCTG) by $125 per ton.

The price increase on carbon and alloy casing and tubing was effective with new orders, Vallourec said in a letter to customers Jan. 16.

The OCTG price increase follows a Vallourec USA notification Jan. 12 stating that the Houston-based company was increasing line pipe prices by $125 to $200 per ton. Vallourec USA is a division of Boulogne-Billancourt, France-based Vallourec SA.

U.S. Steel Corp. and Boomerang Tube LLC are among other domestic mills that raised prices recently on the energy tubulars, according to market participants. Tenaris SA is signaling a sizable price increase, a trader and a distributor said.

Overall OCTG prices have risen sharply over the past month as a result of the rising U.S. rig count and uncertainty over supply of in-demand sizes, market participants reported. Line pipe, though not soaring at the same rate during the period, is now doing better as distributors report normalizing inventories for the first time since the oil-price slump of 2014.

Rig count numbers are coming back from some significant low points during 2016. In fact, last year bottomed out at 404 rigs for the weeks ending May 20 and 27, 2016. After that they started a fairly steady climb to December and January’s higher numbers.

These earlier, lower numbers had a direct and dire effect on steel tubular producers.

“In the US, the average number of rigs in (the first nine months of) 2016 fell by 54 percent compared to 2015,” Shiryaev said. “OCTG shipments decreased by 55 percent year-on-year. At the same time, OCTG months of inventory increased to an average 9.8 compared to 8.3 in 2015, as the rate of decline in consumption outpaced the total inventory reduction in the market.”

That 404 count was a historic low. For most of the past few decades, counts ranged from the 600 to as high as the 2,000 rig range. And there are some other changes within the current growth as well. In late 2015, oil rigs outnumbered natural gas rigs by about 3 to 1; today that has moved up to 4 to 1. That has generated strong demand for OCTG and—to a lesser degree—line pipe, and overstuffed inventories are finally clearing out, distributors said.

“Nearly all the distributors are experiencing an increase in new orders and most are expecting prices to continue to move higher,” Pipe Logix manager Kurt Minnich told AMM via e-mail.

The Pipe Logix distributors’ index, a measure of sentiment, spiked to 74 in December from 69 in the previous month. A reading over 50 indicates an expanding market for demand and prices, and December was the seventh straight month above that watermark.

“In the US, the average number of rigs in (the third quarter of) 2016 increased by 14 percent compared to the prior quarter,” Shiryaev said. “OCTG shipments increased by 41 percent quarter-on-quarter. At the same time, OCTG months of inventory decreased to an average 9.1 compared to 10.8 in the previous quarter, as consumption picked up and total inventory continued its slide down.”

The recent trends, coupled with Trump’s pledge to ease regulation of the energy industry, represent additional pieces of the puzzle for downtrodden providers of OCTG. Tube mills and service centers are looking for OCTG inventories to decline and prices to rise and the $53-per-barrel crude price is helping to rebuild confidence, Leppold said.

“There’s definitely a lot of positive sentiment in the market,” Leppold told AMM, “but it’s still a little bit tempered because it’s coming from such a weak level and you can’t really say ‘recovered’.”

The changes are being felt locally and globally.

“Our subsidiaries did well during the quarter, particularly the U.S. plate and pipe mill,” Seshagiri Rao MVS, Jt. Managing Director & Group CFO, JSW Steel, said in an earnings call. “We are also looking at how the international steel prices are going up. So in China we have seen a $35 tonne increase. In Europe we have seen Euro 60 tonne increase.

“In USA we have already seen $50 tonne increase. So we expect that we will definitely be able to pass a part of this cost increase to the customers in India. So we are looking at better volumes and increasing our value added products and reducing our costs and manage the increase in cost of coking coal and raw materials.”

The Baker Hughes rig count is in the midst of a seven-month recovery. Crude prices have increased to the point where new drilling in shale formations and other regions has become financially feasible again.

Colorado, Wyoming, Pennsylvania and Indiana all saw some jump in rig count this winter. The Indiana rigs were the first running in that state since mid-November, according to Baker Hughes. The nationwide count is about even with the same point last January. 

“The ratio of supply to rigs has decreased, nearer to the long-term average,” Minnich said in an email to AMM. “This indicates a better market balance between supply and demand.”

But there are still some opinions slightly tempering some of the optimism.

“It appears that the U.S. is in for at least some period of time of a run-up in production,” said Paul Vivian, principal at St. Louis-based Preston Publishing Co. “It’s a little better. Nobody’s playing the ‘Happy Days’ song.”

Still, there is also risk of another boom-bust cycle if crude prices do recede this year, said Bjarne Schieldrop, who follows the U.S. oil market as chief commodities analyst at SEB AB in Oslo.

“Lots of rigs will move into the market” during the first half of 2017, Schieldrop said in an email to AMM. “But the supply response ... won’t really kick into the market before 2018 and then it’s too late. Shale players better do their hedging this time.”