May 2020: Natural Gas Supply-Demand Balance Overview And Forecast

May 18, 2020 11:15 AM ETDGAZ, UGAZF, UNG, BOIL, KOLD, FCG, GAZ, UNL, MLPG, NG1:COM9 Comments

Summary

  • Year-over-year average daily rate of consumption of dry natural gas in February 2020 decreased in three of the four consuming sectors.
  • In the aggregate demand structure, the share of exports overtook the share of residential consumption (on a 12-month average basis). However, exports growth rate should slow considerably.
  • Dry gas production is falling. Indeed, in June, annual growth rate of daily production is projected to be negative - for the first time since April 2017.
  • Overall, we believe that, over the next three months, total supply will be growing slower than total demand, ensuring that total supply-demand balance will be tighter (vs. 2019).
  • Annual storage "surplus" is projected to shrink by -73 bcf by June 19. However, storage "surplus" vs. 5-year average is projected to expand (by +40 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 »

The U.S. Energy Information Administration has recently released their natural gas monthly statistics for February 2020. In this article, we will briefly review their consumption and exports figures, then look at our estimates for February and March, and conclude with our latest forecast for May, June, and July.

February Overview

In February 2020, the aggregate demand (national consumption + exports) for natural gas in contiguous United States increased by 1.03% y-o-y to 119.93 bcf/d. Despite the fact that there were 5.8% fewer total degree days (TDDs) than there were last year, natural gas consumption in five key sectors decreased by only 2.8% y-o-y to 96.1 bcf/d, while the drop in total consumption was even smaller - just -2.4% y-o-y. Exports surged by as much as 32.3% y-o-y to 15.59 bcf/d.

Overall, year-over-year average daily rate of consumption of dry natural gas in February 2020 decreased in three of the four consuming sectors. Deliveries of natural gas by consuming sector in February 2020 were:

  • Residential deliveries: 732 Bcf for the month, or 25.2 Bcf/d. Down 12.2% compared with 28.8 Bcf/d in February 2019.
  • Commercial deliveries: 448 Bcf for the month, or 15.4 Bcf/d. Down 8.7% compared with 16.9 Bcf/d in February 2019.
  • Industrial deliveries: 729 Bcf for the month, or 25.1 Bcf/d. Down 1.7% compared with 25.6 Bcf/d in February 2019. Industrial deliveries were the second highest for the month since EIA began using the current definitions for consuming sectors in 2001.
  • Electric power deliveries: 883 Bcf for the month, or 30.4 Bcf/d. Up 9.9% compared with 27.7 Bcf/d in February 2019. 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 6.7% and 111.9% y-o-y, respectively. The average daily rate of natural gas exports was the second highest for any month since EIA began tracking monthly exports in 1973. In February 2020, the United States exported 7.8 Bcf/d of LNG to 24 countries. The average daily rate of LNG exports was the second 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 February, combined pipeline and LNG exports (from contiguous United States) totaled 452.2 bcf or 15.59 bcf per day. The volume of total exports is now equivalent to 14.90% of national natural gas consumption on a monthly basis. On a 12-month average basis, exports now equate to around 13.72% 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 26.50% over the past five years (from February 2015 to February 2020), 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 either U.S. commercial or residential users (on a 12-month average basis) - see the chart below.

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 (+38.30% since February 2015) and industrial consumption (+9.40%). 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 falling by 2.8% y-o-y in February, we estimate that natural gas consumption in five sectors (in contiguous United States) then plunged by almost 7.0% y-o-y in March (to 79.76 bcf/d) but then rose by almost 9.0% y-o-y in April (to 72.06 bcf/d) - mostly due to base effects.

Currently, we expect natural gas consumption in the U.S. to increase slightly (in annual terms) over the next three months. However, frequent changes in the short-range weather models will obviously generate some volatility. Furthermore, it is important to remember that the impact of COVID-19 on natural gas demand will be heavily influenced by the scale and duration of the lockdown. Under the latest weather forecasts, we project that total U.S. natural gas consumption will grow by only 1.10% y-o-y (on average) over the next three months (May to July).

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

  • May: 62.08 bcf/d (+1.13% y-o-y or +0.69 bcf/d y-o-y);
  • June: 65.43 bcf/d (+3.30% y-o-y or +2.09 bcf/d y-o-y);
  • July: 69.53 bcf/d (-1.03% y-o-y or -0.72 bcf/d 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 growth should slow. We currently expect total exports to average 12.08 bcf/d in the May to July period (-0.78% y-o-y). However, please note that our LNG exports' estimates are based on the vessels' tracking system, not on the liquefaction flows. We expect net exports of natural gas to drop to 5.57 bcf/d by August 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.

In February 2020, for the 34th consecutive month, dry natural gas production increased year to year for the month. The preliminary level for dry natural gas production in February 2020 was 2,728 bcf, or 94.1 bcf/d. This level was 4.6 Bcf/d (5.2%) higher than the February 2019 level of 89.4 Bcf/d. The average daily rate of dry production was the highest for the month since EIA began tracking monthly dry production in 1997.

Today, however, dry gas production is falling and is projected to continue falling for the next 8 months (at least). We currently expect dry gas production in contiguous United States to average 88.52 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.

In general, natural gas production is projected to decline for two key reasons:

  1. productivity of new wells has plateaued, while the inventory of old wells is now growing faster than the inventory of new wells.
  2. the collapse in oil prices is prompting companies to deepen spending cuts and reduce future output.

Source: EIA, Bluegold Research estimates and calculations

Overall, we believe that, over the next three months (May-July), 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. Currently, we estimate that annual supply-demand "deficit" will amount to -1.86 bcf/d in May, -4.38 bcf/d in June, and -2.54 bcf/d in July.

Annual storage "surplus" is projected to shrink by -73 bcf by June 19. However, storage "surplus" vs. 5-year average is actually projected to expand (by +40 bcf over the same period).

Source: EIA, Bluegold Research estimates and calculations

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