Market indications predict that the demand for Oil Country Tubular Goods (OCTG) will continue to be strong throughout the next year. Many factors play into this steady path, but to put it simply when the oil and gas industry experiences growth, so do the industries of related products. A closer look into the current happenings in OCTG will do well to explain what the experts are saying on this topic.
First, since the recession of 2009, the oil and gas industry has quickly bounced back and is now seeing far more rigs and drilling activity than just two years ago. This is at the heart of the country’s economic growth, and as such it leads many to question how long the good times will last.
Along with differences between the industries, oil and gas are not readily interchangeable with any other product, and for these reasons the prices can be hard to predict. But in general, it would take a drastic and unexpected change to knock oil and gas from the current assumptions, which indicate similar price levels as those seen in the first half of 2014.
Second, improving rig technology results in higher demand for oil country tubular goods. Rig efficiency has been at its highest level for the last year. Not only are they better equipped for special types of drilling, they also require fewer operators. Additionally, more tons of pipe are being used in horizontal wells, reducing the downtime between moves as pipe consumption increases. According to The American Oil & Gas Reporter, the average rig uses more than 3,800 tons of OCTG per year. Compare that to 1993 when gas drilling rig count was last seen in the low 300s, and only 2,100 tons of OCTG were consumed.
Third, and most notable, are the trade cases that just concluded in August involving the countries of India, the Philippines, Saudi Arabia, South Korea, Taiwan, Thailand, Turkey, Ukraine and Vietnam. The U.S. International Trade Commission declared that six of the nine countries accused of dumping OCTG in the United States market posed a threat of material injury and countervailing duties would be collected for the next five years. This ruling will result in the elimination of large amounts of OCTG imports, potentially making more room for domestic OCTG production and sales.
However, in anticipation of the verdict, the countries flooded the market with their products, resulting in an increased supply without a related demand. Already this spells trouble by interrupting normal market trends, as this surge in supply may also cause facilities to add capacity. Some predict that with facility expansions, older assets may be retired, likely leading to more competition from the entire domestic industry on the world market.
What does this mean for OCTG? Despite excess inventory due to the trade cases, price pressure is still expected to rise moderately along with demand from now through 2015. More rigs, steady oil and gas price levels, increases in pipe consumption and decreases in imports all point to positive expectations for domestic oil country tubular goods.