August 2019: Natural Gas Supply-Demand Balance Overview And Forecast

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

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

External demand also remained elevated, mostly due to stronger pipeline exports into Canada and robust sales of liquefied natural gas.

Next year, the share of exports will overtake the share of residential consumption in the total demand mix.

We currently project that national natural gas consumption will be rising by around 2.92% y-o-y (on average) over the next three months (August to October).

We currently expect to see just +380 bcf in storage by October 2019 (vs. October 2018).

The U.S. Energy Information Administration has recently released their natural gas monthly statistics for May 2019. In this article, we will briefly review their consumption and exports figures, then look at our estimates for June and July, and conclude with our latest forecast for August, September, and October.

May Overview

Aggregate demand (national consumption + exports) for American natural gas increased by 6.70% y-o-y in May 2019 to 79.78 bcf/d. Consumption edged up by only 2.90% y-o-y to 67.94 bcf/d due to cooler weather. However, exports surged by as much as 35.0% y-o-y to 11.85 bcf/d.

Overall, natural gas consumption for May 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 May 2019 increased in three of the four consuming sectors. Deliveries of natural gas by consuming sector in May 2019 were:

  • Residential deliveries: 212 Bcf or 6.8 Bcf/d, which was up 26.2% compared with 5.4 Bcf/d in May 2018. Residential deliveries were the highest for the month since 2008.
  • Commercial deliveries: 185 Bcf or 6.0 Bcf/d, which was up 14.2% compared with 5.2 Bcf/d in May 2018. Commercial deliveries were the highest for the month since 2002.
  • Industrial deliveries: 667 Bcf or 21.5 Bcf/d, which was up 1.1% compared with 21.3 Bcf/d in May 2018. Industrial deliveries were the highest for the month since EIA began using the current definitions for consuming sectors in 2001.
  • Electric power deliveries: 822 Bcf or 26.5 Bcf/d, which was down 3.6% compared with 27.5 Bcf/d in May 2018. Despite this decrease, electric power deliveries were the second highest for the month since EIA began using the current definitions for consuming sectors in 2001.

External demand also remained elevated, mostly due to stronger pipeline exports into Canada and robust sales of liquefied natural gas (LNG), which increased by 76.81% and 52.87% y-o-y, respectively. Natural gas exports in May were the second highest for any month since EIA began tracking monthly exports in 1973. In May 2019, the United States exported 4.7 Bcf/d of LNG to 20 countries. The average daily rate of LNG exports was the highest for any month since EIA began tracking them in 1997.

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 the very strong exports rate. Previously, however, total demand growth was almost entirely driven by national consumption.

This May, pipeline and LNG exports combined totaled 367.21 bcf or 11.85 bcf per day. The volume of total exports is now equivalent to 17.44% of national natural gas consumption on a monthly basis. On a 12-month average basis, exports now equate to around 11.54% of total demand - a new all-time record (see the chart below). Exports' share in the aggregate demand structure has almost 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 21.23% over the past five years (from May 2014 to May 2019), exports have more than doubled over the same period. In fact, exports have already surpassed the "Other" category in the overall demand mix and are now more significant in weight than U.S. commercial users (see the chart below). Next year, the share of exports will overtake the share of residential consumption (on a 12-month average basis).

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/powerburn (+31.69% since May 2014) and industrial consumption (+9.90%). Notice that over the past five years, residential and commercial consumption has remained virtually unchanged.

Source: EIA, Bluegold Research estimates and calculations

Estimates And Forecast

After increasing by 2.90% y-o-y in May, we estimate that natural gas consumption then rose by 2.12% y-o-y in June (to 69.80 bcf/d) and by 2.60% y-o-y in July (to 77.70 bcf/d).

Currently, we expect natural gas consumption in the U.S. to remain relatively stable, but frequent changes in the short-range weather models will obviously generate some volatility. Under the latest weather forecasts, we project that national natural gas consumption will be rising by around 2.92% y-o-y (on average) over the next three months (August to October).

However, the rate will vary significantly for each month. For example, at this moment in time, we expect August consumption to total 78.9 bcf/d (+5.77% y-o-y). We also project that consumption in September will rise by 2.84% y-o-y to 74.0 bcf/d. However, we currently expect consumption in October to remain largely flat y-o-y at 73.5 bcf/d.

Source: EIA, Bluegold Research estimates and calculations

Exports should continue to expand rapidly. We currently expect total exports to average 12.0 bcf/d in the August to October period (+20.4% y-o-y). However, please note that our LNG exports' estimates are based on the vessels tracking system, not on the liquefaction flows, and, therefore, are likely to be revised higher. We expect net exports of natural gas to reach 5.56 bcf/d by October this year.

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.

In May 2019, for the 25th consecutive month, dry natural gas production increased year to year for the month. The preliminary level for dry natural gas production in May 2019 was 2,786 billion cubic feet or 89.9 Bcf/d. This level was 8.5 Bcf/d (10.5%) higher than the May 2018 level of 81.3 Bcf/d.

At this moment in time, we expect dry gas production to average 91.7 bcf/d in August, 92.0 bcf/d in September, and 91.9 bcf/d in October. EIA currently expects U.S. dry gas production to peak in November 2019 at 93.29 bcf/d (see the chart below).

Source: EIA Short-Term Energy Outlook Report

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 2018. We estimate that annual supply-demand surplus will amount to +1.41 bcf/d in September, +2.49 bcf/d in October. However, we do not expect total annual storage surplus to be very large. We currently expect to see just +380 bcf in storage by October 2019 (vs. October 2018).

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.