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

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Includes: BOIL, DGAZ, FCG, GASX, GAZB, KOLD, MLPG, UGAZ, UNG, UNL
by: Bluegold Research
Bluegold Research
Commodities, medium-term horizon, trader
Summary

Total consumption of dry natural gas in September 2019 decreased in three of the four consuming sectors, but total demand still grew by 6.40% thanks to strong exports and powerburn.

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

Under the latest weather forecasts, we project that U.S. natural gas consumption will increase by +5.42% y-o-y (on average) over the next three months (December to February).

U.S. dry gas production has probably reached a major long-term peak.

We estimate that annual supply-demand "deficit" will amount to -6.86 bcf/d in December and -6.04 bcf/d in January.

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

September Overview

Aggregate demand (national consumption + exports) for American natural gas increased by 6.40% y-o-y in September 2019 to 87.01 bcf/d. Consumption rose by almost 3.00% y-o-y to 73.85 bcf/d - primarily due to warmer than normal weather conditions. Exports surged by as much as 30.83% y-o-y to 13.16 bcf/d.

Overall, year-over-year total consumption of dry natural gas in September 2019 decreased in three of the four consuming sectors. Deliveries of natural gas by consuming sector in September 2019 were:

  • Residential deliveries: 110 Bcf for the month or 3.67 Bcf/d, down 1.8% compared with 3.73 Bcf/d in September 2018. Residential deliveries were the third lowest for the month since EIA began tracking them in 1973.
  • Commercial deliveries: 145 Bcf for the month, or 4.8 Bcf/d, down 1.4% compared with 4.9 Bcf/d in September 2018. Commercial deliveries were the lowest for the month since 2016.
  • Industrial deliveries: 642 Bcf for the month, or 21.4 Bcf/d, down 1.8% compared with 21.8 Bcf/d in September 2018. Despite this decrease, industrial deliveries were the second highest for the month since EIA began using the current definitions for consuming sectors in 2001.
  • Electric power deliveries: 1,095 Bcf for the month, or 36.5 Bcf/d, up 6.3% compared with 34.3 Bcf/d in September 2018. Electric power deliveries were the highest for the month since EIA began using the current definitions for consuming sectors in 2001.

External demand remained elevated, mostly due to stronger pipeline exports into Mexico and robust sales of liquefied natural gas (LNG), which increased by 8.11% and 97.90% y-o-y, respectively. Total natural gas exports were the highest for any month since EIA began tracking monthly exports in 1973. In September 2019, the United States exported 5.4 Bcf/d of LNG to 22 countries. LNG exports were the highest for any month since EIA began tracking them in 1997.

Strong growth in exports 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.

Source: EIA, Bluegold Research estimates and calculations

Total demand continues to grow faster than consumption, a trend that 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 September, pipeline and LNG exports combined totaled 395 bcf or 13.16 bcf per day. The volume of total exports is now equivalent to 17.80% of national natural gas consumption on a monthly basis. On a 12-month average basis, exports now equate to around 12.30% 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 24.21% over the past five years (from September 2014 to September 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 (+36.23% since September 2014) and industrial consumption (+9.39%). 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 rising by 2.98% y-o-y in September, we estimate that natural gas consumption then rose by 0.60% y-o-y in October (to 74.00 bcf/d) and by 2.67% y-o-y in November (to 92.70 bcf/d).

Currently, we expect natural gas consumption in the U.S. to increase in annual terms over the next three months. However, frequent changes in the short-range weather models will obviously generate some volatility. Under the latest weather forecasts, we project that U.S. natural gas consumption will increase by +5.42% y-o-y (on average) over the next three months (December to February).

However, the rate will vary significantly for each month. At this moment in time, our consumption forecasting models generate following results:

  • December: 107.8 bcf/d (+11.62% y-o-y);
  • January: 117.2 bcf/d (+6.85% y-o-y);
  • February: 104.7 bcf/d (-2.21% y-o-y).

Please note that there is a large degree of uncertainty to that forecast, as weather models 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. All our forecasting models are updated on a daily basis.

Source: EIA, Bluegold Research estimates and calculations

Exports should continue to expand rapidly. We currently expect total exports to average 15.1 bcf/d in the December to February period (+28.43% 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 +7.79 bcf/d by March 2020.

Total Balance

What about the 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 September 2019, for the 29th consecutive month, dry natural gas production increased year to year for the month. The preliminary level for dry natural gas production in September 2019 was 2,819 bcf, or 94.0 Bcf/d. This level was 7.1 Bcf/d (8.1%) higher than the September 2018 level of 86.9 Bcf/d. The average daily rate of dry production was the highest for any month since EIA began tracking monthly dry production in 1997.

At this moment in time, we expect dry gas production to average 95.2 bcf/d in December, 94.0 bcf/d in January, and 93.0 bcf/d in February. We think that production has already reached a major long-term peak and will remain essentially flat for the next 12 months (at least). In 2020, daily production rate may even decline slightly (in annual terms) because the productivity of new wells has plateaued while the inventory of old wells is now growing faster than the inventory of new wells.

Overall, we believe that over the next three months (December-February), total supply will be growing slower (on an annualized basis) than total demand, ensuring that total supply-demand balance will be tighter relative to 2018-2019. However, total supply-demand balance will vary significantly for each month. We estimate that annual supply-demand "deficit" will amount to -6.86 bcf/d in December and -6.04 bcf/d in January. However, in February, we currently expect annual supply-demand balance to be in "surplus" relative to 2019: +0.81 bcf/d.

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.