Natural Gas Demand Continues to Decline

The EIA currently provides monthly data on natural gas production and consumption through July. Based on the deviations in storage additions from our models, it appears that demand trends are weakening. In fact, in September our model suggests that natural gas demand fell by 1.74 BCF/d, or 2.62%. Since September, the economy has weakened substantially. For example, we had previously modeled that total 2008 electricity consumption would be slightly lower than in 2007. Recent data from the EEI shows electricity demand is down 4% YOY.

Our original estimate of –36% natural gas demand growth in 2009 now looks rather aggressive. Unfortunately, we will not have EIA demand data for October until mid-January. Based on other indicators of demand, such as capacity utilization, it is very safe to say that our previous 2009 demand projections (see our August 14th ‘Dirty Little Secret’ piece here on Seeking Alpha) are too high and future adjustments to our demand model will be to reduce estimated demand going forward.

Industrial demand has accounted for 29.71% of the total natural gas demand in the United States in the past five years. The chemicals sector is the most important component of Industrial natural gas consumption, consuming 35.7% of Industrial gas, followed by food production (9.0%), paper production (7.8%) and iron and steel mills (6.44%). The NAICS durable manufacturing index fell to 116.8 in September from 119.7 in August and 125.5 a year ago, led by a 14% decline in the number of domestic autos sold in September 2008 versus September 2007. Industrial capacity utilization fell from 78.7% in August to 76.4% in September, down from 79.6% in July when the last EIA demand data was available. Clearly natural gas demand from the Industrial segment has declined since the most recent July data from the EIA.

Residential gas demand accounts for 20.4% of the natural gas used over the past five years. Demand in winter 2008/09 is a great unknown as consumers are faced with greater financial stress than in 2007, yet we are expecting a cooler winter than in years past (see our upcoming piece on sunspot cycles and weather) and natural gas prices will remain below the winter range of $6.96 to $10.23 of the winter of 2007/08. It will take several weeks to begin to form a picture of Residential natural gas demand over this coming winter heating season.

During the current shoulder season, it is very difficult to determine the true underlying supply/demand balance, largely due to the variability in temperatures across the country. Like a Keynesian beauty contest, where one should determine not which contestant is the most beautiful but whom the judges find most attractive, it is important to realize that almost ANY winter demand forecast will look partially correct over the next few weeks due to the volatility in weather-related demand week by week. We also worry that some analysts are not properly accounting for the 1.8 BCF/d (as of November 13th) shut-in Gulf of Mexico production. We continue to believe the natural gas market will be quite oversupplied in 2009 (our conviction is growing!), and that natural gas prices will average $6.00 for the full year, but also expect that the data will not prove this to the average investor until mid-December to mid-January.

Comments

[Nathan Weiss:]

Our demand estimate was -.36%, about a third of a percent, in 2009.

2008 Nov 28 07:54 AM

[Nathan Weiss:]

Our demand estimate is -.36%, or about a third of a percent currently (not -36%!). Based on recent trends, an estimate of -2% is much more likely. We will provide a full update in mid-December when winter heating demand becomes apparent.

2008 Nov 28 07:56 AM

[User 60657:]

Nice article, one variable I haven't seen factored in is the natural gas supplies required to support the new fuel terminals that CLNE is building (believe one is on line now) to supply fleets of trucks converted to natural gas. This will obviously create a larger demand for natural gas, and a lower demand for diesel fuel. Also the aggressive conversion of vehicles in Utah to natural gas. I would think this has to affect inventories, but don't see where anyone is factoring in these growing trends.

2008 Nov 28 08:02 AM

[Wolfhounds:]

Great short term thinking. Let's look at KMP, in this nasty recession, raising it's 2009 payout estimate to $4.2 from $4.02. Granted, that's only a 5% increase compared to their average 8-9% increases over time, but it's still an increase. Given the high quality management team which is earns no salary, I'd take their estimates over your hedged guesses.

Oh yes, about that over supply issue. CHK may be delivering a lot less gas given their precarious financial situation.

2008 Nov 28 09:18 AM

[Paul Killinger:]

Maybe we'll learn to welcome the stability that is returning to NG prices and other energy markets. Over time it will most likely improve our overall economic prospects, as well.

2008 Nov 28 09:41 AM

[TaxRECapGai...:]

CHK finds itself in the "Jaws" scenario. They're gonna need a bigger boat. BP and CVX would do well to consider buying them. Where else are you going to get the quant and qual of assets that CHK has found in the last few years?

2008 Nov 28 12:22 PM

[jarco:]

Interesting details of where NG is consumed across the business spectrum

Over the longer haul, its hard to see NG use not increasing dramatically. The down side is expanded drilling by CHK, XTO, etc adding disproportionally to immediate supply.

If KMP looks so good, how about EP? Any thoughts?

2008 Nov 29 11:43 AM

[Nathan Weiss:]

Natural gas use for vehicls is am interestin growth area, but it only accounted for .114% of natural gas demand in 2007, as can be seen in the EIA end use tables:

tonto.eia.doe.gov/dnav...

Most E&Ps really suffer awful cash flows... Look at SandRidge Energy, spending 1.1x 2009 revenues on CapEx to keep production flat from Q4 run rates) in 2009. CHK is in the same boat (to keep the analogy going. It is going to be VERY intersting to see how natural gas E&Ps attempt to fund 2009 CapEx.

2008 Nov 30 02:08 PM

[tndrroot:]

Thanks for an informative article.
A couple of questions:
1. How close is the correlation between the manufacturing index and natural gas consumption. Isn't a large part of NG industrial consumption a fixed cost and therefore not greatly affected by volume increases/decreases?
2. You cover industrial NG use (29%) and residential use (20%). What sector uses the remaining 50%? Is it electrical? Isn't most electricity generation by NG for top off for peak demand? If so, then NG use by electric utilities may not correlate with overall demand fluctuations.
3. What are the current import/export numbers for LNG? Does USA have the capacity to export significant quantities of LNG?

2008 Dec 17 03:49 PM