Energy sector steel demand to take hit as oil prices plunge

Steel demand in the US from the energy sector was likely to take a hit as oil prices tanked Monday.

Crude oil futures plummeted amid a price war triggered between two large oil-producing countries, Saudi Arabia and Russia, after Russia refused to agree on production cuts to support oil prices against the demand disruption caused by coronavirus.

The coronavirus outbreak has been causing demand disruptions in global commodities and lower oil prices due to a potential supply glut that might cause a major negative impact in steel demand from the energy sector.

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A US pipe mill source expected an immediate drop from the oil and gas sector. He also noted a lack of financing for the traders of oil country tubular goods (OCTG).

"A lot of traders were keeping it going with financing. However, financing has become very difficult since oil prices dropped below $50. Now, it will be almost impossible," the source said.

OCTG traders will have an excess of unsold material that they will have to sell below their cost levels, he added.

Oil industry players could shut wells and already have excess material that won't be consumed, according to the source.

He thought drilling activity would take a drastic hit if oil prices stay below $40/b for a month or two.

The NYMEX April WTI contract was hovering around $33/b Monday midday, roughly 28% below Thursday's settlement.

Current oil prices are below the break-even points of the US oil producers and this pricing environment will most likely drag down the drilling activity. US total oil and gas rigs stood at 793 Friday, down 234 from a year ago, according to Baker Hughes data.

Meanwhile, the International Energy Agency slashed its demand forecast Monday. The IEA cut its oil demand projection for the year from 825,000 b/d of growth to a 90,000 b/d contraction, the first annual fall since 2009.

Prices would remain low without any supply control if IEA's forecast comes out accurate.

KeyBanc Capital Markets noted the correlation between the two commodities: "Crude prices are heavily correlated to broader metals prices, and a shock to oil prices will not bode well for the Metals & Mining sector equities."

In 2015, when oil prices dipped below $30/b, US hot-rolled coil prices broke lows not seen since the financial crisis in 2008-2009. The S&P Global Platts US HRC price hit a low of $365/st in December 2015 as oil prices dropped below $40/b.

The current daily Platts TSI US HRC index was at $587/st on Monday.

A service center source with exposure to the tube steel business also expected an immediate drop in steel demand from the energy sector.

US and Canadian steel mills shipped approximately 2.5 million st directly to the oil, gas and petrochemical industries in 2019, according to preliminary data from the American Iron and Steel Institute. The shipment numbers do not reflect the amount of material that is sent to service centers and distributors that are also servicing the industry.