Natural Gas Market Overview: Consumption Is Starting To Rise, But Slowly

Summary

• In the absence of a coronavirus-induced lockdown, total demand for U.S. natural gas (consumption + exports) would have totaled around 595 bcf for the week ending May 8.
• In reality, however, total demand was a lot weaker. We currently expect the EIA to report a build of 108 bcf next week, 8 bcf larger than a year ago.
• Natural gas consumption by the industrial users has bottomed out and is beginning to increase.
• U.S. LNG feedgas flows seem to have stabilized and can potentially ramp up quickly because LNG stocks are currently just "half-full".
• Annual storage "surplus" is projected to shrink by -40 bcf by June 12. However, storage "surplus" vs. 5-year average is actually projected to expand (by +58 bcf over the same period).
• This idea was discussed in more depth with members of my private investing community, Natural Gas Fundamentals. Get started today »

This report covers the week ending May 8, 2020.

Total Demand (if there was no coronavirus)

In the absence of a coronavirus-induced lockdown, we estimate that the aggregate demand for U.S. natural gas (consumption + exports) would have totaled around 595 bcf for the week ending May 8 (down 0.7 bcf/d w-o-w (week over week), but up +5.1 bcf/d y-o-y (year over year)). The deviation from the norm would have remained positive and increased from +11.2 bcf/d to +12.7 bcf/d.

Source: Bluegold Research estimates and calculations

In reality, however, total demand was a lot weaker. For example, natural gas consumption by industrial users has already dropped below the norm and below last year's level (see the chart below). At the same time, notice that consumption has already bottomed out and is beginning to increase.

Source: Bluegold Research estimates and calculations

This week, the weather conditions have warmed up considerably across the contiguous United States. We estimate that the number of nationwide heating degree-days (HDDs) edged up by 3% w-o-w (from 49 to 50), while the number of nationwide cooling degree-days (CDDs) increased by 46% (from 20 to 29). Indeed, total energy demand (measured in total degree-days - TDDs) should be as much as 30.9% above last year's level.

Non-degree-day factors

Non-degree-day factors were "bullish" (vs. last year) but only marginally. The most important five non-degree-day factors that we are looking at are: nuclear outages, the spread between natural gas and coal (coal-to-gas switching), wind speeds, solar radiation, and hydro inflows. In the week ending May 8:

• Nuclear outages were mostly below the norm (17.5 GW per day on average). Please note that the bullish impact from seasonal maintenance at nuclear power plants will be subsiding in the weeks ahead as nuclear power plants are returning to service - see the chart below.
• The average spread between natural gas and coal rose by +$0.026 per MMBtu (as the price of natural gas went up (w-o-w), while the price of coal remained relatively unchanged). We estimate that coal-to-gas switching averaged around 9.4 bcf/d this week (+1.2 bcf/d vs. 2019 and +2.9 bcf/d vs. the five-year norm).
• Wind and solar generation was mostly stronger y-o-y, but hydro generation was weaker. On balance, in the week ending May 8, these three factors displaced some 300 MMcf/d of potential natural gas consumption in the Electric Power sector (compared to the same period in 2019).

Source: U.S. Nuclear Regulatory Commission

Overall, the net cumulative effect from four non-degree-day factors (excluding solar generation) was positive at around +5.2 bcf/d of potential natural gas consumption in the Electric Power sector, which is 0.9 bcf/d above last year's results.

Next week, however, it appears that the net impact from non-degree-day factors is likely to be "less bullish" (vs. 2019). Indeed, in the absence of hot weather, higher natural gas prices (relative to coal) are reducing coal-to-gas-switching potential, while stronger wind generation is displacing record amounts of natural gas consumption in the Electric Power sector.

Source: U.S. Nuclear Regulatory Commission

Exports

Total exports were down 1.1 bcf/d w-o-w. According to Marine Traffic, U.S. LNG export terminals (Sabine Pass, Cove Point, Corpus Christi, Cameron, Freeport, and Elba) served 13 LNG vessels with a total natural gas capacity of 45 bcf. Total LNG feedgas flows averaged 7.3 bcf/d. In annual terms, total exports were up 1.3 bcf/d in the week ending May 8.

U.S. LNG feedgas flows seem to have stabilized and haven't set a new low for 11 consecutive days now. Furthermore, once the foreign demand recovers, LNG flows can quickly ramp up because LNG stocks are, currently, just "half-full" (23.7 bcf below observed capacity).

Source: Bluegold Research estimates and calculations

Total Supply

Dry gas production is trending down. Early morning pipeline nominations have decreased (again), but yesterday's nominations were revised higher.

Latest dry gas production estimate (for the contiguous United States): 90.2 bcf/d

• -6.2 bcf/d from an all-time high
• +0.4 bcf/d from a 3-week low
• -0.2 bcf/d from Thursday's result

We, currently, expect dry gas production in the contiguous United States to average 89.35 bcf/d over the next three months (May-June-July). Annual growth rate is slowing down. Indeed, in June, annual growth rate of daily production is projected to be negative - for the first time since April 2017.

Source: Bluegold Research estimates and calculations

In the week ending May 8, we estimate that the aggregate supply of natural gas (production + imports) averaged around 96.4 bcf/d (down -1.3 bcf/d w-o-w but up +0.9 bcf/d y-o-y).

Storage

Currently, we expect the EIA to report a build of 108 bcf next week (final estimate will be released on Wednesday). Overall, at this point in time, we expect storage flows to average +104 bcf over the next three weeks (four EIA reports). Annual storage "surplus" is projected to shrink by -40 bcf by June 12. However, storage "surplus" vs. 5-year average is actually projected to expand (by +58 bcf over the same period).

Source: Bluegold Research estimates and calculations

Analyst’s 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.

Comments

[ofgktc]

notice you said demand should be 595bvf...but you never said what it was actually...might be proprietary

[ofgktc]

think were looking at 112bcg build

[ofgktc]

demand will start to increase as country opens up

[PT Larry]

Thanks for the article

[mobius2010]

so...what's the well count. I haven't seen it yet.

[ofgktc]

oil rigs dropped by 33 nat gas minus1

[DanJ57]

Oil rigs can be blended natural gas and oil or just oil.

[katmandu100]

Good data and commentary,thanks.

[TheRogue]

So besides nitrogen plants and refineries which are still operating and large users of nat gas, and power plants which industrial users have reduced their nat gas draw that are projected to resume operation and increase demand?

[elliot_mllr]

TheRogue:
My guess is petrochemical plants, transforming ethane into ethylene and then polyethylene and propane into propylene and then polypropylne, and butane and propane into LPG.
Elliot Miller