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Oil price, rig rebounds welcomed by metals makers

Feb 17, 2017 | 03:34 PM | John Ambrosia

The domestic energy boom cycle in oil and natural gas that led to an increased demand for metals, especially tube and pipe, may return.

Recent increasing oil prices have caused celebrations among many steelmakers and in some sectors of the overall economy, as the news has been received as another sign that better times are ahead.

Next to the issue of imports, the economic factor that has dominated the discussion in metals sectors during the past nearly three years is the price of oil. After reaching its 2014 average monthly high of $112 in June, the price for Brent Crude oil fe sharply until reaching a low point about one year ago.

Here is the path of Brent Crude oil prices – the benchmark for world oil prices – since June 2014:

After a decline of nearly 75 percent in under two years, the price has bounced back to about half of what it was in 2014. What happened? A number of factors converged to force prices down. Worldwide consumption of oil has remained relatively strong in recent years, with slight but small fluctuations. But at the same time, worldwide oil production has increased rapidly, overtaking demand. Here is what demand has been doing since 2014:

Usually in situations like these, OPEC decides to cut production, which brings global supply and demand into better balance and keeps prices high. But this time, OPEC did nothing, maintaining its levels of production from mid-2014 and into 2016. This was attributed in part to its desire to undermine U.S. oil production.

Now some of this can be good news for certain metals sectors. Falling oil prices tend to help car sales, especially sales of bigger, heavier vehicles, and that has helped steelmakers. Here are annual U.S. vehicle sales for the past seven years:

That’s good news for flat-rolled steel mills, which means good news for the dealers and brokers that supply those mills with scrap. Even better news is that low gas prices drive the sales of SUVs and light trucks, which use more steel than more fuel-efficient small cars. And it’s also good news for aluminum manufacturers, as that metal continues to gain in market share among automakers.

Beyond auto sales, high oil prices in recent years, combined with a desire to produce more domestic energy, led companies in the US and Canada to aggressively drill for oil in the North Dakota Bakken shale formation and in Alberta’s oil sands. The latter is what all the fight over the XL pipeline is about. The former is a large part of America’s post-recession energy boom.

And this is where the steel and scrap story really comes into play. The domestic energy boom cycle in oil and natural gas led to an increased demand for metals, especially steel and, in particular, tube and pipe products. So the rapid expansion of oil drilling led to more business. But rig counts declined due to falling oil prices. Here is the rig count for Jan. 2015-Jan. 2017 (Weekly averages for each month):

This movement has had an impact on demand for steel. The latest rises in sheet prices have coincided with stronger demand for hot band from welded oil country tubular goods (OCTG) producers and other energy-sector customers, market sources said.

Prices for steel tube and pipe products manufactured for other OCTG sectors have seen similar price performances. In some cases they are at the highest point they have been in a year or more.

The bad news that accompanyies sharply declining oil prices is that oil and gas services and pipeline companies were a lot less busy in 2016. It meant slowdowns and cutbacks in the booming -oil country tubular goods segment of the steel industry. That also means less scrap demand as the steelmakers in those sectors cutback on production. But if the current numbers stick, it could mark a turnaround.

A stronger case can be made when looking at tube and pipe numbers, especially because steelmakers were announcing layoffs and production cutbacks that they say were directly due to issues in downward domestic oil production. If the IEA’s forecasts for the second half of 2017 turn out to be accurate, however, it could lead to a return to normal for U.S. oil and, by extension, the domestic steel sector.