September 2018: Natural Gas Demand Overview And Forecast

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

Total natural gas demand continues to grow faster than consumption, a trend which has been in place since May 2015.

After rising by 7.6% y-o-y in June, natural gas consumption then continued to increase, but at a more measured pace.

Currently, we expect natural gas consumption in the U.S. to remain strong, but annual growth rate will slow significantly.

We expect exports to total 10.1 bcf per day in September, 10.4 bcf per day in October and 10.6 bcf per day in November.

Over the next three months, total supply will be growing faster than total demand, ensuring that total supply/demand balance will be looser relative to 2017.

The U.S. Energy Information Administration has recently released their natural gas monthly statistics for June 2018. In this article, we will briefly review their consumption and exports figures, then look at our estimates for July and August and conclude with our forecast for September, October and November.

June Overview

Aggregate demand (national consumption + exports) for American natural gas surged by 6.9% y-o-y in June 2018. Consumption jumped by 7.6% y-o-y due to very warm weather (there were 9% more cooling degree-days in June 2018 vs. June 2017). External demand also remained strong, mostly due to robust LNG sales, which jumped by 40% y-o-y. In annual terms, however, exports’ growth is slowing down due to base effects. Based on Marine Traffic data, we estimate that Sabine Pass served at least 19 tankers (total natural gas carrying capacity of 60+ bcf). Cove Point served at least four vessels (total capacity of 13 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).

Source: EIA, Bluegold Research estimates and calculations

Total demand continues to grow faster than consumption, a trend which has been in place since May 2015. It points to the rising weight of exports within the overall demand structure. On the chart above, you can clearly see that growth rates in consumption and exports often diverge. Despite occasionally weak consumption, total demand is still growing in annual terms due to very strong exports rate. Previously, however, total demand growth was almost entirely driven by national consumption.

Pipeline and LNG exports combined totaled 257 bcf or 8.6 bcf per day in June. The volume of total exports is now equivalent to 12.5% of national natural gas consumption on a monthly basis. On a 12-month average basis, exports now equate to around 11.70% of national consumption and its share in the aggregate demand structure has more than doubled over the past three 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 16.40% over the past five years (from June 2013 to June 2018), exports expanded by 97.0% over the same period. In fact, exports have already surpassed “Other” category in the overall demand mix and are now just as significant in weight as U.S. commercial users (see the chart below).

Other fast-growing sources of demand include Electric Power/power burn (+17.0% since June 2013) and industrial consumption (+11.2%). Notice that over the past five years, residential and commercial consumption has remained virtually unchanged.

Source: EIA, Bluegold Research estimates and calculations

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

Source: EIA, Bluegold Research estimates and calculations

Estimates And Forecast

After rising by 7.6% y-o-y in June, natural gas consumption then continued to increase, but at a more measured pace. We estimate that it expanded at an annualized rate of 4.6% and 5.7% in July and August, respectively (see the chart below). Weather-induced cooling demand grew by 6.6% and 17.5% y-o-y in July and August, respectively. However, coal-to-gas switching also provided a healthy boost to consumption as the spreads between natural gas and coal remained historically low. Currently, we expect natural gas consumption in the U.S. to remain strong in both relative and absolute terms, but at the same time, annual growth rate will slow significantly.

Source: EIA, Bluegold Research estimates and calculations

Under the latest weather forecasts, we anticipate to see an average 1.9% annual growth rate in September, October and November, thanks to rising nuclear outages, healthy power burn (supported by low ng/coal spread), above normal amount of cooling degree-days (especially in September) and stronger industrial demand (see the chart above). 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 cooling- and heating-degree-days (CDDs and HDDs).

It is also 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 believe that HDDs will start driving consumption from mid-October. Therefore, the ratio of CDD to HDDs in the short-term weather models should be near 1:1 by early October. Currently, the ratio is at 4.3:1 (i.e., for every one HDD there is 4.3 CDDs).

We update our forecasts on a daily basis. If you wish to receive a regular update on key natural gas variables – weather, production, consumption, exports and imports – consider signing up for our exclusive content (see the link below).

Exports should continue to expand, but annual growth rate will slow due to base effects. We estimate annual growth rate was probably just around 26.5% in July and 30.0% in August. Currently, we expect exports to total 10.1 bcf per day in September, 10.4 bcf per day in October and 10.6 bcf per day in November (see the chart below). Please note that our LNG exports forecast is based on vessels tracking system, not on the liquefaction flows. Therefore, it is very likely to be revised higher.

Source: EIA, Bluegold Research estimates and calculations

Total Balance

What about supply? After all, it is not the demand which is driving the price, but the interaction between demand and supply. No doubt, dry gas production is strong. We estimate that it is currently at least 15% above 5-year average. At this moment in time, we expect dry gas production to reach 85 bcf/d by the end of December 2018. As before, however, our forecast will be updated on a daily basis as more data gets processed. Overall, we believe that over the next three months, total supply will be growing faster (on an annualized basis) than total demand, ensuring that total supply/demand balance will be looser relative to 2017. We estimate that annual surplus will amount to 4.9 bcf per day in September, 7.4 bcf per day in October and 4.4 bcf per day in November (see the chart below).

Source: EIA, Bluegold Research estimates and calculations

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.