February 2018: Natural Gas Demand Overview And Forecast

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Includes: BOIL, DCNG, DGAZ, FCG, GASX, GAZB, KOLD, MLPG, UGAZ, UNG, UNL
by: Bluegold Research
Summary

Natural gas consumption in the U.S. increased by 8.70% yoy in November.

Under the latest weather forecasts, we anticipate to see a major 21.0% annual growth rate in February.

However, supply should also increase with dry gas production rising by 10%.

Overall, we still expect SD balance to be tighter relative to 2017.

Demand Overview

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

Aggregate demand (national consumption + exports) for American natural gas was up 10.40% yoy in November. Consumption increased by 8.70%, as the weather was relatively colder (there were at least 20% more heating-degree days in November 2017 than in November 2016). External demand also remained strong, with exports surging by almost 27.0% yoy due to robust pipeline inflows into Mexico and record high LNG sales. Indeed, based on Marine Traffic data, we estimate that Sabine Pass served at least 20 tankers (total natural gas carrying capacity of 70 bcf). Strong exports growth and an increase in national consumption ensured that the growth in total demand stayed positive. In fact, on an annualized basis, aggregate demand has not posted a single negative growth figure since January 2010 (see the chart below). Indeed, 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 were rising and total demand growth, on balance, stayed positive. 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 288.0 bcf in November 2017 (an all-time record), which is equivalent to 12.30% of national natural gas consumption on a monthly basis. On a 12-month average basis, exports now equate to more than 11.70% of national consumption, and its share in 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 16.60% (from January 2012 to November 2017), exports expanded by 108.90% over the same period. In fact, exports have already surpassed the “Other” category in the overall demand mix and are now just as significant in weight as U.S. commercial users (see the chart below).

Source: EIA, Bluegold Research estimates and calculations

*The Other category includes lease, plant and vehicle fuels, as well as pipeline and distribution use.

Other fast-growing sources of demand include Electric Power / power burn (+20.50% since January 2012) and industrial consumption (+12.50%). Note also that since January 2012, residential consumption of natural gas actually declined by 3.20% and remains below its long-term average of 400,000 MMcf.

Source: EIA, Bluegold Research estimates and calculations

Estimates and Forecast

After rising by 8.70% yoy in November, we estimate that consumption then expanded by 6.0% yoy in December and by as much as 14.0% yoy in January on the back of stronger heating demand, but also because of the base effect. Currently, we expect natural gas consumption in the U.S. to remain quite strong in both relative and absolute terms.

Under the latest weather forecasts, we anticipate to see a major 21.0% annual growth rate in February, followed by slower, but no less significant, rates of 13.0% and 16.0% in March and April, respectively. (see the chart below). 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 a low comparison base from the previous year.

It is important to remember that changes in HDDs have 3x stronger effect on natural gas consumption than changes in CDDs, so monitoring weather forecasts on a daily basis is absolutely vital. We update our forecasts on a daily basis. If you wish to receive regular updates 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. Currently, we expect exports to total 10.8, 10.6 and 10.0 bcf per day in February, March and April, respectively. We estimate annual growth rate in exports was probably just around 21% in December and 16% in January. Please note that our LNG exports forecast is based on vessels tracking system, not on the liquefaction flows. Therefore, it is likely to be revised higher.

Total Balance

What about supply? After all, it is not the demand which is driving the price, but the interaction between demand and supply. Dry gas production is growing fast. However, we estimate that total supply (production + imports) is still growing at a slower annual pace than total demand. Here are our latest projections (please note that we update them on a daily basis):

Source: Bluegold Research figures in the Long-term table are monthly totals measured in billion cubic feet. Deviation is from the 9-year norm, measured in billion cubic feet.

Overall, we still expect SD balance to be tighter versus 2017 over the next three months, and therefore, we still expect annual storage deficit to expand until the end of April (at least).

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.