There was a lot on our plates this month as we delivered two critical forecasts for the new year: OCTG consumption and pricing. Mind you, this is no piece of cake considering the state of flux in which we find the oil patch. While 2015 all but knocked the stuffing out of the market, our mission is to provide readers with some grist for the mill that will serve them well into 2016.
It may be hard to stomach, but the fact is we’re all held hostage to energy price uncertainty. And there’s little to suggest we’ll be cooking with gas in the new year: more like a mix of “oil and water” for the foreseeable future. Our mostly murky forecast for oil has prices bouncing between $40 and $55 per barrel (WTI): $40s early on, approaching $50s in 2H16. Weighing on our bearish view is a potential U.S. Federal Reserve rate hike that could spur the U.S. dollar higher putting further pressure on pricing. Nat gas prices won’t fare much better in 2016 as pent-up supply keeps prices rangebound. Lastly, we doubt we’ll find ‘Middle’ ground when OPEC meets December 4.
This brings us to E&P capital spending, which is anticipated to fall closer to operating cash flow levels in 2016, somewhere in the range of -25 to -30% Y/Y as operators become conditioned to doing more with less. With that said, we’re projecting the rig count will average 15 – 20% below 2015. A significant number of assumptions had to be established in order to arrive at our OCTG consumption and pricing forecasts, not the least of which were those detailed above. After slicing and dicing a mountain of metrics, we’re forecasting consumption for 2016 will end the year down ~24%.
Turning to OCTG pricing for the new year, our models tell us that the market is closing in on a bottom. While there are still numerous headwinds to consider, our belief is that a combination of factors (pared inventories, lower import levels, potential for a positive outcome in the HRC trade case) will prevent prices from crashing anywhere near the ~29% drop witnessed in 2015.
There’s simply no sugarcoating it, 2015 was tough. But the fact is: “tough times don’t last, tough people do.” As we observe the holiday season we remain confident that the great minds that reinvented, rejuvenated and revolutionized our industry will surprise us yet again. And for that we give thanks.
Photo Courtesy Tenaris