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Tom M. Brown: Entering late July and early August, oil prices have been declining and yet there has been an increase for drilling, particularly fracking in the Permian Basin and The Dakotas. What market dynamics are causing these events to occur?
Steve Letko: Tom, oil rose 1 percent on July 14, 2017 boosted by a supply interruption in Nigeria, and prices were headed for a weekly gain of more than 4 percent on lower U.S. stockpiles. Trading was volatile as global supply remained strong and concern about economic prospects.
I think the big driver for price is in the global inventory numbers. U.S. Crude inventories fell 7.6 million barrels last week, the largest weekly plunge in 10 months. Still, oil stocks remained above the five-year average. Prices are more than 16 percent below their 2017 highs.
As is usual in the U.S., overly aggressive drilling and production have increased dramatically offsetting cuts in world production agreed to by OPEC. Production and demand appear to be in balance; however, the world surplus inventory is still putting downward pressure on world pricing.
Oil prices below $50 a barrel are not sustainable. Drillers should be prudent and exercise discipline when it comes to new oil production (Continental Resources CEO Harold Hamm).
Oil took a tumble the first half of 2017 down 14 percent in an oversupplied market. “The energy sector has been down, but it is not out,” said Rob Thummel, managing director for Tortoise Capital. “The fundamentals are set up for a second half comeback. You are going to see crude oil inventories globally and domestically begin to decline month after month. That will support crude oil prices, boosting the entire sector.”
The lack of capital investment in U.S. production due to stagnant under $50 a barrel pricing may be leading to an under supply of crude oil, resulting in a rise in crude prices.
While this period of adjustment is going on, drillers don’t want to drill themselves into oblivion. Back up, be prudent and use some discipline.
TMB: Steve, besides renewed activity in the oil sector, what other areas in construction are growing? What specific markets do you see as offering dynamic growth for pipes, valves and fittings?
SL: Tom, according to the U.S. Department of Commerce, construction seasonally adjusted is up 3.6 percent and continues to show gains from previous months. Most of the gains come for the private construction sector up 7 percent and home building up 7.5 percent. Construction’s weakest sector is public work down 6.5 percent from a year ago.
The U.S plans on seeing $56.7 billion in second half 2017 industrial starts. The PMI (Purchasing Managers Index) for the month of June was 57.8 percent up, 2.9 percent from May. The state of the manufacturing sector looks good.
Among the largest projects are data centers, such as:
In addition to data centers, major projects that are scheduled for ground breaking are:
I recently spent time in the Baltimore and Washington D.C. market area that seems to be one of the hottest markets in the U.S. The interesting takeaway was the resurgence in the demand for domestic products. For those of us who are in the domestic welding fitting and flange manufacturing sector, this is welcomed news.
TMB: I’ve been reading lately about pipeline construction, maintenance and repair. Having a modern pipeline system is very important to our energy business and the overall economy of the U.S.
SL: You are correct in saying a modern pipeline system is important; it is critically important, that we have a modern, efficient and safe delivery system for oil and gas.
As the power industry converts to natural gas from coal, it needs to bring large volumes of gas efficiently to the generating station. Gas from the Marcellus and Utica is critically needed to fuel projects in Ohio, Pennsylvania, Maryland, North Carolina and South Carolina.
This demand is generating several major projects that are scheduled for construction during the second half of 2017.
In addition, the demand for gas required to feed the LNG export terminals in the gulf coast is driving the demand for additional pipeline capacity from the Permian basin.
In addition to new capacity demand, older pipelines (many in the ground for 50 years) have been ordered by DOT to be inspected and upgraded for replaced on an expedited basis.
The increase in demand for new and retro-fit pipelines will generate demand for high yield welding fittings and flanges, valves and related materials as well as a skilled labor force for the foreseeable future.
TMB: As we have discussed in previous columns, labor and material shortages are influencing the U.S. mechanical systems industries. How are these limiting conditions affecting pricing in your area of expertise in carbon steel flanges and fittings?
SL: Material and labor shortages have not been a factor in affecting pricing in the carbon steel forged steel flange and buttwelding fitting market.
What has been a problem has been the increase in the import of low priced offshore material that have deflated the pricing of both commodities.
Weldbend and Boltex initiated an antidumping investigation into the unfair trading by Indian, Spanish and Italian producers of finished carbon and forged steel flanges.
The Department of Commerce, after a lengthy investigation, has made a final determination supporting the allegations of Weldbend and Boltex.
Antidumping Duties (AD) and Countervailing Duties will be imposed as follows:
India AD / CVD:
It is my understanding that tariffs resulting from the Section 232 investigation would be added to the AD / CVD duties listed above.
In addition, to the Weldbend/Boltex collaboration, Tube Forgings of America, Hackney/Ladish and Mill Iron works have collaborated and have initiated circumvention investigation by the Department of Commerce into the circumvention of duties currently in place involving Chinese material being circumvented through Malaysia producers for carbon steel buttwelding fittings. This remains an ongoing investigation as of this writing.
Finally, Weldbend and Boltex have jointly filed a lawsuit against two companies that are allegedly selling “N” stamped normalized carbon forged steel flanges that are allegedly not in the normalized condition. This litigation is in the court pending a resolution as of this writing.
As a result of the recent ruling it is suggested that you check with your supplier for possible pricing revisions for carbon forged steel flanges on a regular basis.
TMB: Steve, what is the latest with the section 232 investigation on aluminum and steel?
SL: Tom, under Section 232 of the Trade Expansion Act, the president has broad power to adjust imports, including through tariffs, if excessive foreign imports are found to be a threat to U.S. national security.
The president has authorized Secretary of Commerce, Wilbur Ross, to prioritize a Department of Commerce investigation into the effects of steel imports on U.S. security.
Currently Aluminum and Steel investigations are under way. The Section 232/ NAFTA hearings on Aluminum are under way and available on YouTube:
The Section 232 investigation for steel and steel products are currently the fact-finding stage and public hearings are anticipated to begin in November or December.
TMB: That wraps it up…see you in Houston!