American Oil and Gas Reporter - September 2016 - 77

SpecialReport: Tubulars Technology
crease inventory. When demand is falling,
less inventory is required to meet demand,
and part of what is required is being satisfied through inventory liquidation. Because of this, at some point OCTG producers/importers end shipping at a level
below the level of consumption until
drilling improves or active inventories
run dry.
That is where we find ourselves as
the summer of 2016 turns into fall, and
nearly two full years after the start of the
downturn. This, of course, assumes that
the rig count has hit bottom and has
either started a genuine growth cycle
(doubtful) or represents opportunistic
growth with improving oil prices (almost
certainly). Nonetheless, it is very likely
we have seen the bottom of the OCTG
consumption curve for this cycle.
As one would expect, as the industry
ships pipe below the consumption level,
new pipe shipments eventually will increase as the market runs out of inventory.
Intuitively, that makes complete sense
and likely would get no argument. However, to prove the theory, we need to look
at a cycle where the market bounced
around at the bottom of the consumption
curve for some time and then plot what
happened to shipments to see when they
recovered. That rarely happens.
And truthfully, that would tell only
part of the story anyway. The degree to
which the market was over-inventoried
(i.e., how severe the cycle was and how
quickly it developed) plays a role in the
timing of increased shipments.
Factors other than the slope and severity

of the downturn also can have some influence, but we will ignore those issues
for sake of keeping this analysis brief.
For this study, we analyzed the last four
cycles-including the current one-with
the goal of seeing whether we could determine the lag between reaching the bottom of the OCTG consumption curve
and the point at which shipments improved.
As noted, the first criterion was identifying cycles where consumption remained somewhat flat at the bottom. The
second criterion was finding cycles with
similar peak-to-trough measurements in
both volume and time, since that would
determine the absolute amount of inventory
overhang when consumption hit the low
point.
Comparing Cycles
As one can imagine, there are a host
of other differences that can influence
the data. For example, all cycles are different in their origin. Every cycle we have
looked at, prior to the current one, was
caused by an economic issue that affected
commodity prices. While the economy is
certainly tenuous, today's cycle was caused
by a deliberate bid for market share. That
is a problem because it is likely to influence
the time spent at the bottom of the consumption curve and in recovery.
In the 1997-2000 cycle driven by the
Asian financial crisis, economic concerns
pushed oil prices lower and affected both
U.S. oil and natural gas drilling activity.
This was the result of cash flows from
oil still being larger than from natural

FIGURE 3
OCTG Trends during 2008-11 Cycle

250.0

OCTG Consumption

14.0

150.0
8.0
100.0

6.0
4.0

50.0
2.0
-

-
1

3

5

7

9

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

300.0

12.0

250.0

10.0

8.0

200.0
OCTG Shipments
150.0

OCTG Consumption

6.0

OCTG Inventory Months
100.0

4.0

50.0

2.0

-

Inventory Months

12.0
10.0

Inventory Months

OCTG Inventory Months

200.0

16.0

OCTG Consumption/Shipment Index

OCTG Shipments
OCTG Consumption/Shipment Index

FIGURE 4
OCTG Trends during Current Cycle
18.0

300.0

gas in the United States, and they were
used to fund oil and gas company budgets.
However, since the United States was
more gas-focused (gas drilling accounted
for 60 percent of total activity at the beginning of the cycle and 80 percent at
the end), the OCTG cycle was not particularly severe, as shown in Figure 1. In
fact, of the four cycles we studied, it was
second in severity.
In addition, the OCTG consumption
curve only spent a few months at the
bottom, and had recovered to its precycle
level within a year. That said, in this
case, shipments spent about 16 months
below the consumption level and four
months below consumption levels after
the OCTG curve hit bottom. The total
length of the cycle from peak, precycle
OCTG consumption to a return to that
level was 33 months.
The 2001-04 cycle did experience a
prolonged period with a depressed, flat
consumption curve. This cycle was caused
by the recession related to the Sept. 11
terrorist attack and a gas bubble created
by a high rate of natural gas drilling after
the winter of 2000-01, exacerbated by
the recession.
As Figure 2 shows, consumption was
relatively flat from about month seven to
month 20. In this case, OCTG shipments
spent six months below the consumption
level with three of those months coming
after the OCTG curve hit its lowest point.
Recovery to precycle consumption took
close to two years.
In our minds, there are two problems

-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Cycle Duration (in months)

SEPTEMBER 2016 77



Table of Contents for the Digital Edition of American Oil and Gas Reporter - September 2016

Contents
American Oil and Gas Reporter - September 2016 - Cover1
American Oil and Gas Reporter - September 2016 - Cover2
American Oil and Gas Reporter - September 2016 - Contents
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American Oil and Gas Reporter - September 2016 - Cover3
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