Commodities | Feb 04 2009
By Chris Shaw
With the US economy continuing to struggle, Barclays Capital notes concerns are emerging in the market over the demand outlook for natural gas. These concerns are supported by anecdotal evidence suggesting the most gas-intensive industries have already scaled down operations by as much as 50% in some cases.
While data to date don’t indicate any demand slowdown is deeper than previously expected, the analysts points out industrial production data, which provide a more timely indicator, show the numbers for gas demand are likely to turn down further.
There are two major drivers of demand, one being weather and the other being the level of industrial activity. A positive in recent weeks has been colder than normal weather and while this is not a reliable demand driver, Barclays notes it has helped offset the weakness in industrial demand and so improved the position with respect to storage levels.
Recent data show overall gas consumption rose 1.9% in year-on-year terms in November thanks largely to favourable (read colder) weather conditions and to reflect this the group has cut its end-of-season storage forecast by 200Bcf (billion cubic feet) since the start of that month.
But the more important measure remains natural gas consumption by the industrial sector as this gives a better indication of weather-adjusted demand trends. The analysts note this number fell by 4.3% in November in year-on-year terms but has since fallen at a faster rate as the US economy has deteriorated further.
It is this uncertain demand outlook that has driven prices lower over the past month, but in the group’s view the pace of moderation in industrial demand has failed to match the declines in industrial production indices. The dichotomy makes some sense as Barclays points out efficiencies of scale decline as capacity is reduced, meaning consumption of natural gas per unit of production can rise even as production overall falls.
Market sentiment with respect to natural gas is likely to be driven by US economic data in coming months and the group’s view is while the economy will continue to contract through the second quarter of 2009, it should begin to recover in the second half of the year. This suggests the natural gas market is currently experiencing the greatest fall in demand in the cycle.
Come the second half of the year the weak industrial demand of the third and fourth quarters of 2008 mean easier comparables, this at the same time as US gas production is forecast to be in decline. This means the latter stages of 2009 could show a relative improvement in natural gas consumption, though Barclays cautions there is a wide range of possible outcomes at present given the weak economic environment.