January 2018: Natural Gas Demand Overview And Forecast

by: Bluegold Research

Aggregate demand for American natural gas was up 9.9% YoY in October 2017 and continued to grow in November and December.

Natural gas consumption should rise markedly in both January and February this year.

Exports should continue to expand rapidly, but annual growth rate can slow due to base effects.

Historical Overview

The U.S. Energy Information Administration (EIA) recently released its natural gas monthly statistics for October 2017. In this article, we will briefly review the consumption and exports figures, then look at our latest estimates for November and December and conclude with our forecast for January, February, and March.

Aggregate demand (national consumption + exports) for American natural gas was up 9.9% YoY in October. Consumption increased by 5.7% as weather was relatively colder (there were some 14% more heating degree days than in 2016). External demand also remained strong, with exports surging by almost 56.0% YoY due to robust pipeline inflows into Mexico and record high LNG sales. Indeed, based on MarineTraffic data, we estimate that Sabine Pass served at least 22 tankers (total natural gas carrying capacity of 75 bcf).

Strong exports growth and an increase in national consumption ensured that the growth in total demand stayed positive at almost 10% YoY. In fact, on an annualized basis, aggregate demand has not posted a single negative growth figure since January 2010 (see chart below). Total demand has been growing faster than consumption since May 2015, pointing to the rising weight of exports within the overall demand structure.

On the chart below, you can clearly see how the growth rates in consumption and exports have diverged over the past year or so. While consumption has been falling lately, exports have been rising, and total demand growth, on balance, has stayed positive - although it has slowed over the past few months. Previously, however, total demand growth was almost entirely driven by national consumption.

Source: EIA, Bluegold Research estimates and calculations

Pipeline and LNG exports combined reached 275.0 bcf in October 2017 (an all-time record), which is equivalent to 13.50% of national natural gas consumption on a monthly basis. On a 12-month average basis, exports now equate to more than 11.60% of national consumption. Its share of the aggregate demand structure has more than doubled over the past two years.

Source: EIA, Bluegold Research estimates and calculations

Exports remain the fastest growing source of demand for American natural gas. While total demand (12-month average) increased by 15.60% (from January 2012 to October 2017), exports expanded by 103.30% over the same period. In fact, exports have already surpassed the "Other" category - which includes lease, plant and vehicle fuels, as well as pipeline and distribution use - in the overall demand mix. They are on course to become as significant in weight as U.S. commercial users (see chart below).

Source: EIA, Bluegold Research estimates and calculations

Other fast-growing sources of demand include electric power/power burn (+20.50% since January 2012) and industrial consumption (+12.00%). Note also that since January 2012, residential consumption of natural gas actually declined by 5.20% and remains below its long-term average of 400,000 MMcf.

Estimates and Forecast

After rising by 5.7% YoY in October, we estimate that consumption then expanded by almost 10.0% YoY in November and by 6.0% YoY in December on the back of stronger heating demand. That expansion was also because of base effects, as natural gas consumption over the last two months of 2016 was relatively subdued by historical standards. Currently, we expect natural gas consumption in the U.S. to remain quite strong in both relative and absolute terms.

Given the latest weather forecasts, we anticipate to see a major 18.0% annual growth rate in January, followed by a whopping 28.0% growth rate in February and a relatively "modest" 11% growth rate in March. Please note that there is a large degree of uncertainty to that forecast, as weather models remain volatile and can generate sporadic changes in the number of heating and cooling degree days (HDDs and CDDs).

Also, please note these two-digit growth figures are partly the result of low comparison base from previous year. It is important to remember that changes in HDDs have a 3x stronger effect on natural gas consumption than changes in CDDs, so monitoring weather forecasts on a daily basis is absolutely vital. As such, we update our forecasts on a daily basis. If you wish to receive a regular update on key natural gas variables - production, consumption, exports and imports - consider signing up for our exclusive content (see the link below).

Source: EIA, Bluegold Research estimates and calculations

Exports should continue to expand rapidly. However, the annual growth rate can slow due to base effects, although it is not our base case scenario for now. Currently, we expect exports to total 9.9, 10.6 and 10.5 bcf per day in January, February, and March, respectively (see chart above). We estimate annual growth was probably just around 22% in November and 21% in December.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.