Industrial Demand Hit By Lower Oil & Gas Activity?

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Includes: OIL, USO
by: BTU Analytics

Summary

Industrial natural gas demand declined in 2015 mostly due to weather, but some sectors declined on economic activity.

Steel sector natural gas consumption declined by 15% compared to 2014, as slower drilling activity reduced the demand for steel.

New industrial demand is on the way, but will the projects be enough to boost prices?

The process of oil & gas exploration and production touches many parts of the US economy. The slowdown has not only impacted those directly involved, but it has started showing up in sectors that use natural gas to empower US shale extraction. Recently, Evraz Rocky Mountain Steel in Pueblo, Colorado, announced plans to temporarily idle production on its steelmaking and rail mill operations lines. While the company does not expect the reduction in production to be permanent, this lower output comes on the heels of previous production cuts that affected the seamless pipe unit, a subset of industrial manufacturing that supplies the oil & gas industry. Everaz has noted in the past that slowdowns were the result of the downturn in the commodities markets, and that downturn has rippled into natural gas demand.

In January 2015, the plant announced it was laying off 200 workers due to waning demand for pipes used in oil & gas drilling and production. Natural gas flow data to the Evraz plant in Pueblo shows that the facility has consistently received less gas since the start of 2015. From 2010 through early 2013, deliveries were pretty consistent at 13.5 MMcf/d. Flows decreased to 10.5 MMcf/d from May 2013 to December 2014, and have since declined to 8 MMcf/d (black line, right axis on graph below). Flows to all US steel and iron end users in pipeline flow data have also noted declines in recent years (blue bars, left hand axis on graph below), with the annual average in 2015 declining by 15% compared to the previous 5-year average.

Click to enlarge

While a warm winter in 2015 was partially to blame for industrial demand coming in lower than it did in 2014, the above shows that there are other factors at play in the market. Industrial demand declined 0.7 Bcf/d in 2015 compared to 2014, equating to 105 Bcf over the course of this past winter. While industrial demand alone would not have solved the current oversupply situation, it could have helped burn a little more of the excess gas in storage. As we mentioned in our previous post, "The Industrial Revolution Stalls?", more demand is on the way, but as the Evraz layoffs show, growth can be derailed by changing economic conditions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.