Prices have fallen and rig counts have dropped, but the market seems to be managing through the downcycle adequately.
The inherently cyclical nature of the energy sector has once again reared its head, with the market spending much of the past 12 months on the downslope. The optimist would note that means the rebound is not far around the bend.
“We have to realize we’re halfway through the downward part of a cycle. Last year was spectacular. The second half of the year there was decline. From a percentage perspective what’s been given back was fairly muted compared to what was gained,” says Mike Hubbell, executive vice president, American Piping Products, St. Louis.
Two major indicators of the state of the energy space tell the same story. The average price of Brent crude oil peaked at $122 in June of 2022. In the following 12 months, that price went on an almost straight drop down, settling into the $75 range. Should this be the bottom, that would be an excellent place to settle for the industry.
When the price hits $70 to $75 per barrel, the industry is still at a level where the oil companies can make enough money to keep drilling, but the consumers aren’t too sensitive to the price. “We always tell our sales guys that’s kind of the sweet spot,” says Randy Hurst, president, Challenger Pipe & Steel, Spokane Valley, Wash. “We’re keeping our fingers crossed it stays in that realm.”
The decline in price has been, quite naturally, followed by a similar falloff in the number of rigs in operation. According to Baker Hughes, there were 654 active rigs in the United States during the week that ended Aug. 11, a decline of 109 from the same period a year earlier. The story was a little less dramatic in Canada, which had seen a drop of 11 to 190 rigs.
In contrast, internationally the count jumped by 128 from July 2022 to the same month in 2023.
Though the percentage drop was significant for both the price and the rig count, the numbers for both remain fairly healthy. That’s helped keep demand for pipe and tube products at a respectable level.
“So many of the rigs that have gone offline are the independent or swing players. There is a foundation of consistent business that will be there. If we see this uptick, which we’ve seen the last two weeks on oil price, we could see more of an increase and some of those swing-type independent players will be back in the market,” says Hubbell.
In fact, in some ways, the severe rig count decline is a bit of a surprise, given the price remains at historically profitable levels. Brad Benditz, petroleum engineer for Steel Alloys and Services, Houston, notes the breakeven rate for the Permian Basin was typically about $25 to $30 per barrel.
“Even if everything goes up – material costs, equipment, etc. – there’s no chance the breakeven there isn’t $45 to $50 per barrel. That just screams, ‘get more rigs out there, do more drilling and do it as fast as you possibly can,’” he says.
Vivian notes that a lot of the smaller operations have been acquired by the larger companies, but those new assets are not being employed in great numbers. “You have to think these guys are going to start saying, ‘we bought all this up, we’re going to have to start drilling,’” he says, while noting the industry followers have a lesser sense of the thinking behind rig activity than has existed in quite some time.
So why aren’t there more rigs in operation? Benditz believes the major oil companies are exercising a little more discipline, willingly trading some activity now to maintain a nice solid pricing environment. If that is the case, it could lead to a little less volatility in the years ahead, as prices wouldn’t swing nearly as much or as quickly.
“We believe in the post-COVID world, we’re not going to have the $120 spike and crash back down to $10 or $15. It will be much more of a slow ramp up,” he says.
That would be much more predictable if not for the influence of OPEC on the market, with the bloc able to move production up or down, often for reasons outside traditional supply-demand dynamics. “At the end of the day, it’s the whole world production that dictates pricing, even on the WTI side of things,” Benditz says.
Of course, as is always the case, the energy pipe and tube market is never uniform in terms of performance. The fluctuation in demand levels for specific types of energy products means the markets can differ for various pipe and tube products or by geographic region.
At the moment, 2023 is shaping up as a very strong year for line pipe and a more subdued, inventory-challenged market for oil country tubular goods, says Paul Vivian a partner with Preston Pipe.
“Line pipe numbers are up dramatically, almost to the point where you don’t want to say the number. Now, last year was a terrible year in line pipe, so it’s probably not fair to compare them at the mind-point.”
In contrast, “because of the drilling situation, we’re not seeing much from things like mechanical tube or completion equipment,” adds Vivian, whose company will once again host an OCTG and Line Pipe Forecasting Summit Oct. 5 at the Hyatt Regency in Houston.
OCTG’s issues are inventory based, Vivian says. Earlier this year, as demand started to slip, products were still coming in from offshore. That’s led to an inventory overhang of approximately seven months, well above the four to five months the sector prefers.
“It seems like toward the beginning of the year, we had quite a bit of imports in tubular. There’s a lot of inventory in the OCTG arena,” says Nick Klenovich, vice president of commercial business groups for Webco, Sand Springs, Okla.
Why so much? The tight supply conditions of 2021 and 2022 led to an overreaction, with consumers buying just to have material on hand. “I don’t think people stopped and did the math very well. They pressed the panic button,” Vivian says. “Granted, it was a smaller button than back in the 1980s, but it was still the panic button.”
The main worry heading into the remainder of the year for OCTG is the possible effect of destocking on pricing, especially if an industry player decides to get particularly aggressive. Fortunately shipments remain at decent levels, which should prevent any kind of major rollback in prices that can accompany an oversupply situation.
“If we were to ship at today’s level for the rest of the year, we’d be over six million tons, which is a pretty good year. I’ve got to think at some
For certain applications, the week-to-week or month-to-month movements on the price of oil and gas can lead to significant changes in activity. Other project work is much less subject to those daily fluctuations.
A lot of Webco’s stainless steel tubing is destined for offshore drilling projects, major undertakings. “There’s still a lot of optimism in the offshore space. We haven’t seen a slowdown in that area,” Klenovich says. “The land-based stuff is often small, individual operators running rigs. They can scale up and down much quicker.
“Offshore is a slow boat to turn,” he says.
The same is true for some of the liquified natural gas projects, even though the spot price has tumbled even further there than with crude oil. The Henry Hub price has fallen from a high of $8.81 in August 2022 down to just $2.18 per million Btu in June. The price has since rebounded to $2.55 in July.
Hubbell describes the LNG space as “the shining star of the last three months,” for reasons that mirror the offshore segment. “Those projects take quite some time and consume quite a bit of steel,” he says. “We see those products consumed by LNG projects are on the uptick, and that gives us a tangible feeling it’s heading in the right direction and could be somewhat sustainable for the foreseeable future.”
Obviously, given its global nature and heavy presence in some of the world’s more unstable locations, the energy market can be particularly susceptible to geopolitical events. On the other hand, the 2022 invasion of Ukraine by Russia and the sanctions that followed were mostly absorbed by the market with not much disruption.
Still, the varying conditions have left the supply chain a little apprehensive as the fourth quarter approaches.
“When we were at the NASPD meeting in June, the prevailing sentiment there was everybody was just watching. Nobody was buying a lot of inventory; they were keeping the purse strings tight,” says Hurst, a past president of the trade group representing steel pipe distributors. “And the sentiment in the last month since then is everything has stayed flat.”
But flat isn’t so bad, particularly compared with the possible alternative.
“It used to be all the economic smart guys at the table were calling for a recession,” Hurst added. “If this is a recession, bring it on.”
[Caption:]
Lower crude oil prices and rig counts have not gutted the energy pipe and tube space. (MCN file photo)