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.