American Oil and Gas Reporter - September 2016 - 79

SpecialReport: Tubulars Technology
with this comparison. First, this cycle
was very mild compared with the other
three. Second, because of the brevity of
the prior upcycle, inventory remained under control. The length of the cycle was
35 months.
The great recession-driven cycle of
2008-11 lasted 33 months, and OCTG
shipments spent 11 months below the
consumption level. One interesting thing
to note about Figure 3 is that the order of
magnitude, as defined by the index, was
about double that of the previous two cycles (and similar to the current cycle
shown in Figure 4).
Inventory reached a whopping 16-plus
months of supply, but there was a unique
component during the 2008-11 period:
Chinese imports were extremely high, and
according to our research, a significant
quantity never made it into the active
supply chain. In other words, much of this
OCTG was purchased on speculation.
The trade case that resulted in very
high duties for most Chinese material,
coupled with the downturn in demand
caused by the recession, put a large quantity of this Chinese material in limbo.
Eventually, much of the product was
scrapped. This had the effect of shortening
the return to higher shipment levels by
as much as three-five months.

We think it tells us plenty.
Active inventory has to be the right
item in the right place, and must not
have deteriorated to the point of necessary
downgrade. At the end of June, OCTG
inventory was about 1.8 million tons,
which is still more than 10 months of
supply at current consumption levels.
This was down from 2.8 million tons in
November 2014 and a peak of 3.2 million
tons.
Of the 1.8 million tons, we think there
are 1.2 million tons of stage 2 inventory
(that is, product ready to go down hole)
and 600,000 tons of stage 1 inventory
(plain-end product, primarily imports).
Based on our internal analysis of product usage by region and regional declines
in drilling, about one-third of stage 2 inventory is in the wrong place or in the
wrong hands. This primarily would be
material in the Bakken and Rocky Mountains, but there is some inventory owned
by oil companies that falls into this category as well.
Of that, some percentage yet to be

quantified is obsolete because of changes
in string design, and some is not salvageable. We believe two-thirds of stage
1 inventory is obsolete or has deteriorated
to the point it is not salvageable. This
leaves about 1.0 million tons in active inventory.
Given today's consumption rates and
the length of time shipments have been
below consumption levels, it should be
no surprise that shipment levels have
begun to improve.
What could derail this? A drop in consumption, obviously, driven by another
retreat in oil prices, or perhaps a lack of
budgets as the year draws to a close.
These are the two most likely risks.
And the recovery? Looking at our
forecast, interestingly enough, if the
second half of 2017 turns out to be the
right timing for oil supply and demand
to be in balance, which would push up
both oil prices and the U.S. rig count, the
cycle that began in late 2014 would have
lasted between 31 and 36 months. Look
familiar?
❒

Significant Difference
That brings us to the present cycle,
which was more or less "engineered" as
opposed to precipitated by an economic
issue. This can make a significant difference in how the recovery looks.
Assuming the low point of consumption
has been hit-and we believe that, in fact,
it has-it took 20 months to get there,
similar to the 1997-2000 cycle. The other
two downturns hit bottom within one year.
In the current cycle, shipments have
been below consumption for 14 months,
again comparable to 1997-2000. In this
downturn, the peak-to-trough decline was
about 75 percent, however, compared
with about 50 percent for the earlier
cycle. Finally, inventory peaked at similar
levels at about the 20-month mark.
Natural gas drilling pulled us out of
the 1997-2000 cycle; there are no saviors
this time other than time.
What does all this tell us in terms of
improving shipments and active inventory?

RICK W.
PRECKEL

Rick W. Preckel is a principal at
Preston Publishing Company in St.
Louis, a steel pipe and tubulars market
research and consulting firm that publishes the monthly "Preston Pipe &
Tube Report," analyzing U.S. and Canadian supply. With 29 years of experience
in the tubulars industry, Preckel's background includes all key functions of running a business, including accounting,
marketing, supply chain management,
information technology, strategy, and
expansion. His former roles include
chief executive officer, vice president of
investor relations and business development, vice president of shared services,
marketing manager, and controller.
Preckel holds a B.S. in business with an
emphasis in accounting from the University of Missouri.

PAUL E.
VIVIAN

Paul E. Vivian is a principal at Preston Publishing Company. He has 34
years of experience in the pipe and
tubing industry, working in both distribution and manufacturing. While in the
distribution business, Vivian was involved
in purchasing, inventory management,
supply procurement, sales, and site selection. While in manufacturing, his
focus was on business plan development,
forecasting, international trade, and
sales. Vivian holds a Ph.D. in economics
with an emphasis on statistics, and is a
graduate of the University of Wisconsin's
graduate school of banking.

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American Oil and Gas Reporter - September 2016

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