Ty’s Take for 01-27-17

This week I’m traveling so please do not expect long prose or an overly complicated analysis. I will save that for two weeks from now, once I have had an opportunity to review all of the major OEMs and Big Oil’s final 2016 reports. And while I have been monitoring some of the news surrounding the release of these reports, I have not personally dove into them in detail or read the transcripts from the various CEOs earnings calls.

Things are rocking along. Almost all of our customers are reporting significant increases in activity. And what we have noticed at FSM is that we are not only seeing an increase in the number of quotes and order conversion, we are also seeing bigger and bigger orders – an indication that for the first time in a long time people may be ordering for stock. Steel pricing has stabilized and is increasing as input costs are increasing (scrap, Nat Gas, and various alloying elements). Mills are starting to build backlog again (we are ordering now for May delivery). Major OEMs are reporting service price increasing. And at least for us, for the first time in over two years, we are developing holes in our inventory that we cannot fix in the short-term as we can’t find the material (on one order for a good customer, we had to call 10 different places to source it, and ended up having to source out of state). In short, we appear to be entering recovery.

Despite grumblings from OPEC and a shot across the bow that they may not renew the output cuts in 6 months, OPEC has substantially complied with their agreements as have many of the non-OPEC countries that joined in. This is fantastic and bodes well as a substantial amount of crude has already been removed from markets. While we got news of an inventory build this week, overall, I think we can expect to see that start to decrease over the coming months.

My words of caution remain though. The EIA has stated that if OPEC does not renew the cuts and the U.S. ramps up to anywhere near prior production levels, absent a significant change on the demand side, the world could once again find itself awash in oil by the end of the year. That would certainly comport with my fear of shorter boom and bust cycles. I was just hoping they would not be that short.

The thing this week I found most interesting was the BP Energy Outlook. And in particular, the fact that they no longer see transport/logistics (i.e. combustible fuel) for taking the vast amount of recovered oil by 2035. Instead, goods such as fabrics and petrochemicals are now predicted to be the main consumers of crude oil. That is a remarkable change and a fairly bold prediction. Think about it: right now about 70% of the oil used in the U.S. is used for transportation. 28% of all energy (any type of energy) in the U.S. is used for transportation. That is a remarkable change but speaks to the long-term viability of our industry.

Sorry for the abbreviated message this week, but my lovely fiancé probably wants me to enjoy our two days of vacation together rather than spend our trip writing a long article. I wish you all the best, and I look forward to writing a more detailed analysis in the next edition of Ty’s Take.