March 2020: Natural Gas Supply-Demand Balance Overview And Forecast
Summary
- Overall, year-over-year total consumption of dry natural gas in December 2019 decreased in two of the four consuming sectors and increased in the other two.
- 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 edge down by 0.30% y-o-y (on average) over the next three months (March to May).
- Over the next three months, total supply will be growing slower (on an annualized basis) than total demand, ensuring that total supply-demand balance will be tighter (relative to 2019).
- In April, we currently expect supply-demand balance to be in "deficit" relative to 2019: -5.70 bcf/d.
- This idea was discussed in more depth with members of my private investing community, Natural Gas Fundamentals. Get started today »
The U.S. Energy Information Administration has recently released their natural gas monthly statistics for December 2019. In this article, we will briefly review their consumption and exports figures, then look at our estimates for January and February, and conclude with our latest forecast for March, April and May.
December Overview
Aggregate demand (national consumption + exports) for American natural gas increased by 7.84% y-o-y in December 2019 to 116.76 bcf/d. Despite the fact that there were 2.3% fewer total degree days (TDDs) than there were last year, natural gas consumption increased by 4.86% y-o-y to 101.24 bcf/d. Exports surged by as much as 32.34% y-o-y to 15.52 bcf/d.
Overall, year-over-year total consumption of dry natural gas in December 2019 decreased in two of the four consuming sectors and increased in the other two. Deliveries of natural gas by consuming sector in December 2019 were:
- Residential deliveries: 751 Bcf for the month, or 24.2 Bcf/d. Down 1.8% compared with 24.7 Bcf/d in December 2018. Residential deliveries were the lowest for the month since 2015.
- Commercial deliveries: 456 Bcf for the month, or 14.7 Bcf/d. Down 0.7% compared with 14.8 Bcf/d in December 2018. Commercial deliveries were the lowest for the month since 2015.
- Industrial deliveries: 776 Bcf for the month, or 25.0 Bcf/d. Up 1.6% compared with 24.6 Bcf/d in December 2018. Industrial deliveries were the highest for the month since EIA began using the current definitions for consuming sectors in 2001.
- Electric power deliveries: 897 Bcf for the month, or 28.9 Bcf/d. Up 17.7% compared with 24.6 Bcf/d in December 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 Canada and robust sales of liquefied natural gas (LNG), which increased by 9.06% and 79.57% y-o-y, respectively. Total natural gas exports were the highest for any month since EIA began tracking monthly exports in 1973. In December 2019, the United States exported 7.1 Bcf/d of LNG to 24 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. In 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.
Last December, combined pipeline and LNG exports totaled 480.9 bcf or 15.52 bcf per day. The volume of total exports is now equivalent to 15.30% of national natural gas consumption on a monthly basis. On a 12-month average basis, exports now equate to around 13.03% 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 26.81% over the past five years (from December 2014 to December 2019), exports have more than tripled 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 (+38.82% since December 2014) and industrial consumption (+9.68%). 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 4.86% y-o-y in December, we estimate that natural gas consumption then dropped by 4.32% y-o-y in January (to 104.9 bcf/d) and then declined by 0.93% y-o-y in February (to 106.1 bcf/d).
Currently, we expect natural gas consumption in the U.S. to decrease slightly (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 edge down by 0.30% y-o-y (on average) over the next three months (March to May).
However, the rate will vary significantly for each month. At this moment in time, our consumption forecasting models generate the following results:
- March: 85.9 bcf/d (-8.20% y-o-y);
- April: 78.8 bcf/d (+7.45% y-o-y);
- May: 68.3 bcf/d (-0.16% 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. That is why 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 14.9 bcf/d in the March to May period (+26.84% 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 +8.04 bcf/d by June 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. Dry gas production remains relatively strong, but is declining slowly month-on-month and is projected to continue falling for the next 12 months (at least).
In December 2019, for the 32nd consecutive month, dry natural gas production increased year to year for the month. The preliminary level for dry natural gas production in December 2019 was 2,977 bcf, or 96.0 Bcf/d. This level was 7.3 Bcf/d (8.2%) higher than the December 2018 level of 88.7 Bcf/d. The average daily rate of dry production was the highest for the month since EIA began tracking monthly dry production in 1997.
At this moment in time, we expect dry gas production to average 94.41 bcf/d in March, 93.55 bcf/d in April, and 92.91 bcf/d in May (as per EIA methodology). Production has already reached a major long-term peak and is likely to decline (in annual terms) in 2020 because the productivity of new wells has plateaued, while the inventory of old wells is now growing faster than the inventory of new wells. Moreover, the recent collapse in oil prices is a major disaster for shale producers. They will have to deepen spending cuts and reduce future output.
Source: EIA, Bluegold Research estimates and calculations
Overall, we believe that over the next three months (March-May), total supply will be growing slower (on an annualized basis) than total demand, ensuring that total supply-demand balance will be tighter relative to 2019. However, total supply-demand balance will vary significantly for each month. We estimate that annual supply-demand "surplus" will amount to +8.5 bcf/d in March. However, in April, we currently expect supply-demand balance to be in "deficit" relative to 2019: -5.70 bcf/d.
Source: EIA, Bluegold Research estimates and calculations
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