Oil country tubular goods hit a rough patch

The oil country tubular goods (OCTG) industry is under pressure, but that’s something it deals with on a regular basis. Like most commodity businesses, OCTG companies know the boom-to-bust cycle all too well.

For those unfamiliar with OCTG, they can think of it as being any of the seamless rolled tubes or pipes used to remove oil and gas from the earth. These products, which include drill pipe used to rotate the drill bit, the casing pipe that lines the borehole, and the tubing used to transport oil or gas from the source, are exposed to tremendous pressure and have to stand up to corrosive elements.

OCTG production, like many aspects of oil and gas exploration and extraction, has slowed tremendously in 2015 as oil prices plummeted in response to a global economic slowdown and major suppliers such as Saudi Arabia and Russia unwilling to cut back production even when faced with decreased demand.

Any dramatic rebound doesn’t seem to be in the offing. Energy research firm Wood Mackenzie has estimated that oil companies have invested $220 billion less than what it estimated for 2015 and 2016. The firm’s researchers don’t believe prices will start to recover until 2017.

To learn more about this, The FABRICATOR reached out to Susan Murphy, publisher of “The OCTG Situation Report^®,” to establish some context for this current downturn and what the future might hold.

The FABRICATOR: How does this slowdown in the OCTG industry compare to previous ones? Are there any major similarities or differences?

Susan Murphy: The environment for OCTG at this time is very challenging. We often say this period has brought new meaning to the word “turm-oil.”

Actually, it is now being labeled the worst downturn in the history of the industry. Unfortunately, OCTG is not immune to this volatility, and those in OCTG will have to suck it up as the market surrenders to the “lower for longer” recovery we face.

The last major downturn for OCTG was in late 2008 on the heels of the recession. Oil prices tanked in February 2009; the rig count bottomed out in June; and OCTG prices hit their nadir in December of that year. The big difference between this downturn and 2008 is the curve that followed. In 2008 emerging economies caused oil prices to repair quickly, making for a V-­shaped recovery. This time around it is languishing into an L-­shaped recovery—more like those experienced in the 1980s—which explains the “lower for longer” credo the oil market has adopted as the new normal.

The recovery coming out of 2008 was good for most commodity-­related sectors, but OCTG missed out on the pricing recovery, instead plowing a rather painful path that held prices mostly flat over the past six years. This was due in large part to a flood of low-cost OCTG imports from April 2010 to April 2015 that added immense supply to a well-stocked market.

Susan Murphy is the publisher of “The OCTG Situation Report,” which has covered the North American OCTG market for almost 30 years. The report includes exclusive OCTG surveys and forecasts to help the industry better understand current and historical trends.

One must remember that steel imports to the U.S. have been bolstered by the strengthening U.S. dollar against global currencies, which made the imports even cheaper in dollar terms. Concurrently, domestic OCTG capacity was increasing to meet the demands of the shale revolution, which didn’t help firm pricing either.

Even the recent “success” of the 2013 OCTG trade case decided last year in August, in which some countries were found guilty of dumping OCTG in the U.S. at less than their fair value and had countervailing duties placed on their exports to offset their domestic subsidies that allowed for the dumping, offered only temporary relief to OCTG prices. There are many reasons for this, but much of it had to do with the low margins assigned to the bulk of named countries along with the overwhelming inventory build in the U.S.

As it stands right now, OCTG inventories are being trimmed, and import levels have dropped significantly, two necessary events that will help pave the path to the eventual recovery. OCTG prices continue to erode as we speak. We expect these trends to continue to some degree for the short to medium term. Meanwhile, demand for more popular grades of new pipe continues, albeit sluggishly when compared to previous years.

Bottom line, there’s no sugar-coating it: Our industry is under relentless pressure from years of excess steelmaking capacity, which includes imports and domestics alike, and was exacerbated by commodity volatility and patchy economic growth. For players in the OCTG space, the next couple of years likely will be an uncomfortable waiting game. Those that can survive the market gyrations will be the winners. Until then, we probably will see a number of consolidations, some closures, and far less operational capacity.

FAB: Following the Great Recession, the metal fabrication industry has become much more cautious with investments and hiring. Were OCTG mills cognizant of an impending downturn, or were they simply working long and fast to keep up with market opportunities?

Murphy: I’m not sure anyone, including most top analysts, saw this coming. However, domestic OCTG manufacturers responded quickly, cutting shipments sharply when the reality of the situation hit home in January of this year.

Unfortunately, it wasn’t only shipments that were scaled back. Many have had to reduce work shifts, cut staff, and idle operations.

FAB: Do any segments outside of oil and gas have demand for OCTG product?

Murphy: I wish I could say “yes” to this question.

OCTG is an initialism for oil country tubular goods, which are used specifically in oil and gas well drilling operations. Simply put, OCTG is beholden to commodity prices that determine exploration and production capital expenditures budgets that ultimately trickle down to drilling activity.

FAB: What needs to happen to put the OCTG industry on a positive track for growth?

Murphy: I hate to sound dour, but the outlook for the time being remains bleak. Believe me, it’s a lot more fun to report on the industry when it’s rocking.

The things that need to happen are mostly beyond this sector’s control as it is so closely linked to oil and gas prices. Natural gas presents the next best opportunity for growth in the U.S. Industry efficiencies born out of innovation have driven a great deal of consumption over the last decade, and it is likely that oilfield service companies will continue to churn out innovations, hoping for a new game-changer.

And while it’s hard to imagine another oil or gas renaissance on the horizon, how many predicted the U.S. shale revolution prior to 2007? When the oil patch begins its turnaround—and it will, as this is the industry of booms and busts—demand will be the catalyst for positive movement and renewed vigor in the OCTG sector.

Susan Murphy is the publisher of “The OCTG Situation Report,” susan.murphy@octgsituationreport.com, www.octgsituationreport.com.