American Oil and Gas Reporter - September 2016 - 76

SpecialReport: Tubulars Technology
Inside OPEC, Iran has said it intends
to increase production to presanction levels, although there are questions about
how quickly it can accomplish that objective, given the level of investment required. Already pushing output to its
highest level, Saudi Arabia is indicating
it has more production capacity, but many
experts believe the Saudis are running as
hard as they can.
Returning To Balance
Mix this all up, and assuming the
trends and assumptions are correct, it
looks like supply and demand are likely
to return to balance in 2017.
As it becomes evident the point of rebalancing is approaching, oil prices will
climb. Our view is that the addition of
rigs in the United States initially will
soften the upward slope of the price line.
This is based on the fact that money
seems to be waiting in the wings for opportunities to invest in oil and gas development, and there are U.S.-based operators
prepared to put incremental rigs to work
in short order. After all, that is what these
companies do.
Both these factors are supported, in
our opinion, by events in May and June
when oil prices rose. Why? Shale development can result in quick-hitting supply
additions, which improves the likelihood
of opportunistic activity growth prior to
a more structural shift in the supply/demand balance.
At some point, however, unless OPEC
or others have ready capacity to add, the
slope will steepen. We believe it takes an

FIGURE 1
OCTG Trends during 1997-2000 Cycle
OCTG Shipments

150.0

12.0

OCTG Consumption
OCTG Inventory Months

8.0
6.0

50.0

4.0
2.0

-
1

9 11 13 15 17 19 21 23 25 27 29 31 33
Cycle Duration (in months)

76 THE AMERICAN OIL & GAS REPORTER

Inventory And Shipments
As for OCTG inventories, as we noted,
having a handle on inventory in the supply
chain is important to pipe producers, importers, distributors and consumers. OCTG
industry veterans are all too familiar with
the "leveraged" boom-and-bust cycles
that occur with swings in the rig count.
As the rig count increases, domestic
OCTG producers ramp up and importers
buy more to support the higher levels of
activity and increase pipe in inventory to
support stronger consumption. As the
cycle turns, pipe orders are cancelled
and deliveries slow, but not enough initially, which only exacerbates the inventory
situation.
We use the term leveraged because
when demand is increasing, the industry
ships OCTG to support demand and in-

OCTG Shipments

10.0

OCTG Consumption

9.0

OCTG Inventory Months

8.0
7.0

100.0

6.0
5.0
4.0
50.0

3.0
2.0
1.0

-
1

5 7

9 11 13 15 17 19 21 23 25 27 29 31 33 35
Cycle Duration (in months)

Inventory Months

100.0

10.0
Inventory Months

OCTG Consumption/Shipment Index

150.0

incremental 150-200 rigs in the United
States to add 100,000 bbl/d of oil production, and given the decimation that
has occurred in the oil patch, that can
and will not happen overnight.
Regarding natural gas, we continue
to be amazed at the amount we are producing and the resiliency of that production
in the face of very low rig counts. Bullish
trends in natural gas include ever-increasing consumption for power generation, increasing exports to Mexico, and
growing liquefied natural gas exports.
We certainly are not saying gas drilling
is going crazy, but we do believe the situation in the domestic natural gas market
is more supportive of activity growth
than it is a damper on growth.

FIGURE 2
OCTG Trends during 2001-04 Cycle
OCTG Consumption/Shipment Index

Before delving into inventory issues,
let us first examine the forecast for OCTG
products. Reviewing market dynamics
for oil and natural gas gives us a sense of
how commodity prices are likely to behave
over the next 18 months, which in turn
provides an indication of how oil and
gas companies will act on those commodity prices.
Looking first at crude oil, from a highlevel perspective, markets are well supplied. There is a plethora of information
on that topic pretty much everywhere
one looks in the news, so there is no
need to repeat it here. Suffice it to say
that storage is brimming and the industry
as a whole has been producing more
than the world has been consuming.
That has kept things dreary in the
short term, but the good news is the production and demand trend lines are looking
more positive for getting back to work in
2017. In fact, both the International
Energy Agency and the U.S. Energy Information Administration issued reports
in August that indicated supply and demand were starting to balance already.
It is clear that production has fallen
significantly outside the Organization of
Petroleum Exporting Countries over the
past 18 months. EIA estimates U.S. oil
production dropped 1.1 million barrels a
day between April 2015 and July 2016.
Meantime, IEA expects a 2.2 MMbbl/d
increase in global refinery throughput in
the third quarter (to a record 80.6
MMbbl/d), lagging expected demand
growth and eroding some of the product
stocks built since mid-2015.

American Oil and Gas Reporter - September 2016

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