The Covid pandemic and its impact on the oil and gas markets has been felt in the OCTG markets. Rystad Energy predicts that global OCTG demand will now fall 27% year-on-year, this year, to just 12.16 million tonnes. The drop in demand surpasses the last down-turn which was seen in 2016, when global OCTG demand slipped 27% year-on-year. North America is forecast to lead the declines, we are now expecting a whopping 55% year-on-year drop in demand. The regions of the world less exposed to an immediate drop in demand are Europe and Russia. In the rest of the article we will examine in more details three of the largest regional OCTG markets, North America, China and Southeast Asia and the Middle East.
North American OCTG market to see a rapid fall in demand in 2020
The North American OCTG sector is the most responsive globally to fluctuations in commodity prices. A combination of short-term drilling contracts and an extremely competitive E&P sector in the US contributed to a swift curtailment of activity when oil prices began declining in late February this year. This in turn has led to a severe reduction in OCTG installation activity, estimated to total 50% by the end of 2020 in the US and 60% in Canada. Across both US and Canada sectors, a total of c.2.8 million tonnes of OCTG is expected to be installed this year, lower than the 3.2 million tonnes required at the previous low point in 2016.
Producers and distributors across the continent are under heavy pressure with a $40/bbl WTI price not supporting material demand growth in OCTG volumes. Drilling and completions activity remain at historic lows, albeit with activity indicators levelling off in August, indicating that the industry may have hit the cyclical trough.
While demand remains weak, product imports have been robust throughout the first half of 2020, reducing by only 12% compared with the second half of 2019. This has increased pressure on pricing and has presented domestic producers with unwelcome competition, primarily from South Korea, Taiwan and Mexico. Imports typically constitute 40% to 50% of monthly demand requirements, but exceeded 100% in May and June. Domestic mills themselves are now operating at minimal capacity across both seamless and welded grades with backlogs running low.
A combination of weak demand and over-supply has seen inventories on the ground build substantially, particularly over the past three months. Inventories of API connections in particular are high and growing, while premium and semi-premium connection have performed better. Total inventory is estimated at over 2.4 million tonnes at the time of writing, indicating that prices will remain weak in the near term.
OCTG demand is expected to rebound in 2021, particularly in the US. However, over-supply threatens to limit profitability in the sector until late 2021 or 2022.
Asian OCTG demand decline due to Covid-19, but pipe prices resilient
In Asia, the ongoing Coronavirus has resulted in the planned reduction in upstream capex spending among NOCs and IOCs across the region, hence having a negative impact on the region’s OCTG consumption in 2020. Nevertheless, each individual market and region has a slightly different reaction on how to move forward with their drilling schedules and when their OCTG demand will recover from the previous base level.
In Southeast Asia, the projected oil and gas production in 2020 falls by 5% y/y while the market could face further decline until 2025. Totally, the combined OCTG demand among a few major markets, Thailand, Malaysia, and Indonesia, is forecasted to fall by more than 10% y/y to around 180 thousand tonnes in 2020. In terms of the region’s OCTG procurement pattern, as the market transitions into an NOC market, major players Pertamina and PTTEP’s total combined market share in the region will grow to around 60% in two years. This means a shift in the region’s OCTG tender strategy including the sourcing of casing and tubing.
Currently, China and Japan are the two largest exporters of OCTG into the region, feeding different materials requirements with Japan leading the chromium grade OCTG supplies and China shipping most of the carbon grade materials. While the general suppliers’ mix is not expected change dramatically over time, each operator has their own approved OCTG mill list and this will have an impact on future OCTG tender awards moving forward. At the same time, certain in-country purchase rules by individual governments will also have an impact on OCTG sourcing and imports, depending on the certain country’s in-house capacity of OCTG production.
Unlike the last oil price downturn in 2014, this time the OCTG prices have remained resilient. Although most suppliers’ market recorded fall in price offerings, the market is not expecting any major price slump under the current circumstance. Particularly, amid this market downturn, export prices from China has been increasing since April. It is worth noting though that the current price rally seen out of China in recent months is mainly driven by costs instead of demand. On the demand side, domestic demand has indeed served as a major support base for prices, with CNPC’s 1 million tonne open tender in April and the recent 200 thousand tonne two-year tender out of CNOOC, OCTG pipe mills utilization rate has been improving from a major decline seen in February and March. However, what has really been driving up prices is the price hike among raw materials, particularly iron ore, which in turn helped lift prices of steel round billets in the Chinese market. Therefore, even though prices remain at a healthy level, overall mills’ profitability still has space for improvement, and at the same time, regardless of domestic tender activities, mills are still waiting for a worldwide recovery for export opportunities in order to process the extra-capacity.
OCTG demand forecast to soften slightly in the Middle East in 2020
OCTG demand in the Middle East is forecast to be down by around 8% this year, to just over 1 million tonnes compared to just under 1.1 million tonnes last year. Total market demand was already at a low in 2019 compared to the peak in 2015, when the market was consuming over 1.2 million tonnes. This was due to the fact that the largest OCTG procurer in the region, Saudi Armaco, was already largely absent from OCTG procurement as its focused on an inventory run-down.
All other key markets across the GCC, Iraq and Iran are also showing softening demand, although none are expected to see the collapse in demand that we have seen compared to the US OCTG market this year.
Major long-term OCTG tenders are still coming in the market here. KOC has launched a, significant, 500 thousand tonne tender for OCTG requirements for its Deep Drilling group, and a second long-term tender is also expected soon for its Development Group. The UAE should also start to see deliveries of OCTG arriving for its mega 5-year OCTG tender that was issued, last year.
The sign of major tenders being released is positive. However, if oil and gas prices do remain under pressure for long periods of time, we could see the scheduling of OCTG tonnages arriving for these tenders being delayed beyond the original schedule. Middle East NOCs are not completely immune to a down-turn in the industry, and will slow drilling if its required, which will knock through to OCTG demand. Therefore, we could see further downward revisions in short-term demand for OCTG across the region.
While the North American market is expected to see a rebound in OCTG demand in 2021, the Middle East market, like much of the rest of the world markets, we don’t expect to see a rebound in demand until further out in 2022. Investment cycles tend to be longer here, with operators not as quick to react to collapsing oil prices as the onshore US shale operators, but activity will also take longer to ramp up when the market sees a sign of recovering oil prices.