February 2019: Natural Gas Demand Overview And Forecast

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

Natural gas consumption for November was the highest level for the month since 2001 when EIA began using the current definitions for consuming sectors.

November was the 19th consecutive month that industrial deliveries set a new monthly high.

Natural gas exports were the highest for any month since EIA began tracking monthly exports in 1973.

In February and in March, total supply will be growing slower (on an annualized basis) than total demand ensuring that total supply-demand balance will be tighter relative to 2018.

The U.S. Energy Information Administration has recently released their natural gas monthly statistics for November 2018. In this article, we will briefly review their consumption and exports figures, then look at our estimates for December and January and conclude with our forecast for February, March, and April.

November Overview

Aggregate demand (national consumption + exports) for American natural gas increased by 14.2% y-o-y in November 2018 to 100.49 bcf/d. Consumption jumped by 13.90% y-o-y to 89.27 bcf/d, while exports surged by 16.68% y-o-y to 11.21 bcf/d, setting a new monthly record.

Natural gas consumption for November was the highest level for the month since 2001 when EIA began using the current definitions for consuming sectors. Year-over-year, total consumption of dry natural gas in November 2018 increased in all four consuming sectors. Deliveries of natural gas by consuming sector in November 2018 were:

Residential deliveries: 591 Bcf or 19.7 Bcf/d, which was up 26.3% compared with 15.6 Bcf/d in November 2017. Residential deliveries were the highest for the month since EIA began tracking residential deliveries in 1973.

Commercial deliveries: 380 Bcf or 12.7 Bcf/d, which was up 18.0% compared with 10.7 Bcf/d in November 2017. Commercial deliveries were the highest for the month since EIA began tracking commercial deliveries in 1973.

Industrial deliveries: 726 Bcf or 24.2 Bcf/d, which was up 4.3% compared with 23.2 Bcf/d in November 2017. Industrial deliveries were the highest for the month since EIA began using the current definitions for consuming sectors in 2001. November was the 19th consecutive month that industrial deliveries set a new monthly high.

Electric power deliveries: 754 Bcf or 25.1 Bcf/d, which was up 13.7% compared with 22.1 Bcf/d in November 2017. Electric power deliveries were the highest for the month since 2001 when EIA began using the current definitions for consuming sectors.

External demand also remained strong, mostly due to higher pipeline exports into Mexico and robust LNG sales, which increased by 3.9% and 34.3% y-o-y, respectively. Natural gas exports were the highest for any month since EIA began tracking monthly exports in 1973. In November 2018, the United States exported 3.6 Bcf/d of LNG to 15 countries.

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).

Natural gas demand

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.

Last November, pipeline and LNG exports combined totaled 336.4 bcf or 11.2 bcf per day. The volume of total exports is now equivalent to 12.6% of national natural gas consumption on a monthly basis. On a 12-month average basis, exports now equate to around 10.55% of total demand and its share in the aggregate demand structure has almost doubled over the past two years.

natural gas exports

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 22.7% over the past five years (from November 2013 to November 2018), exports more than doubled over the same period. In fact, exports have already surpassed "Other" category in the overall demand mix and are now more significant in weight than U.S. commercial users (see the chart below).

Total natural gas demand

Source: EIA, Bluegold Research estimates and calculations

*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 (+31.1% since November 2013) and industrial consumption (+12.1%). Notice that over the past five years, residential and commercial consumption has remained virtually unchanged.

total natural gas demand by end use

Source: EIA, Bluegold Research estimates and calculations

Estimates And Forecast

After rising by 13.9% y-o-y in November, we estimate that natural gas consumption then dropped by 7.9% y-o-y in December to 91.1 bcf/d thanks to warmer weather. Weather-induced heating demand also dropped in January but less severely - by around 0.9% y-o-y to 105.8 bcf/d.

Currently, we expect natural gas consumption in the U.S. to remain quite volatile and almost entirely driven by changes in the short-term weather models (especially in February and March). Under the latest weather forecasts, we anticipate to see an average annual growth rate of 3.2% in February, March, and April. However, the growth rate will vary significantly for each month (see the chart below). For example, at this moment in time, we expect consumption to rise by as much as 12.5% y-o-y in February (due to above normal HDDs and very favorable base effect). However, we then expect consumption growth to slow to 9.4% y-o-y in March (due to milder, but still relatively cold weather). In April, we expect consumption to plunge by 12.0% y-o-y due to just normal weather and a very unfavorable base effect.

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 are absolutely vital. However, it is also very important to understand that the weather models (especially during the shoulder season) are extremely volatile and the forecast beyond day five gets very uncertain. Just to give an example, if we take the latest GFS 00z and ECMWF 00z weather models and apply standard confidence intervals to their respective forecasts, we will see that the storage outlook for the week ending February 22 would vary from -170 bcf to -210 bcf.

Exports should continue to expand at double-digit rates. Currently, we expect exports to total 11.7 bcf per day in February, 11.6 bcf per day in March, and 11.1 bcf per day in April (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.

Natural gas fundamentals forecast

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. The average daily rate of dry natural gas production for November was the highest for any month since EIA began tracking monthly dry natural gas production in 1973. We estimate that as of today, dry gas production is no less than 19% above its 5-year average, while total supply is around 15% above its 5-year average. On a relative basis, total supply is weaker than dry gas production because imports have been steadily declining over the past few years.

At this moment in time, we expect dry gas production to average 87.4 bcf/d in February, 88.8 bcf/d in March, and 88.8 bcf/d in April. We do not expect dry gas production to grow significantly in 2019. Overall, we believe that in February and in March, total supply will be growing slower (on an annualized basis) than total demand ensuring that total supply-demand balance will be tighter relative to 2018. We estimate that annual deficit will amount to -5.9 bcf/d in February and -2.7 bcf/d in March. However, supply-demand balance is currently projected to be loose in April (relative to last year) by around +15.3 bcf/d.

Natural gas supply demand balance forecast

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.