Thursday Night Gas Report Thoughts + A Section On Gas Demand

Natural gas traded up $0.20 to close at $7.82 on what was essentially an inline withdrawal from storage of 155 Bcf (Street was at 158 Bcf; I was at 175 Bcf).

Here's Where Storage Stands Now: 

Zcomment:

While there are plenty of names I want to own Calls on for 4Q earnings and/or reserve reports broader market concerns (as in the fact that it plunges on a daily basis) and my sense is that gas prices are due for a slight retreat in the next couple of weeks are now taking precedence.

 

This broad market correction has led to a sharp, albeit unwarranted decline in the gassy stocks of the XNG, which are far more insulated from anything but the more serious industrial economic downturns than the oilier names in the energy patch. But you should never fight the market, especially when the trend is not your friend. On the brighter side of things, the bakers dozen or so of E&P companies I plan to be long during 4Q reports are trading at even steeper discounts to net asset value right before we get fresh reserve reports. Whether the market is willing to listen is a different matter. My guess is they will for at least a few days or weeks allowing for some good short term moves. Beyond that, the market will certainly re-exert a certain degree of dominance.

 

Special Section: Price Thoughts Meet Recession Thoughts.

Much has been said over the last few days about the potential for a recession to bleed off gas demand. I thought I'd take this opportunity to briefly expand upon some thoughts from Tuesday's post.

Many people are not used to looking at demand or supply of natural gas in the U.S. so here are a few things to keep in mind before looking at the charts. The government provides monthly government data by consuming sector (industrial, residential, electrical etc all the way down to gas consumed by vehicles which is tiny). I convert that data into daily data by dividing it by the number of days in the month, that way, January and March don't outweigh a short dayed month like February.

First taking a look at total gas demand in the U.S. 

The chart above represents all the categories of gas demand and as you would expect demand is highest in the winters when demand for home and commercial property space heating soars. In the summers, gas demand falls off but maintains a slightly growing baseline as it is increasingly used for electricity generation while industrial uses slowly wane.  Note that a series of increasingly mild winters retarded gas consumption and this helped to create a series of higher peak gas storage levels seen here.

Next, looking at Industrial Demand...

...the long term trend is down. As I wrote on Tuesday:

Since 2000, prices have been relatively high to what was once considered normal for gas…and the industrial complex changed. Not overnight but definitely through necessity. Process gases were substituted for more expensive methane when possible and weaker, margin wracked industries like Paper in some cases were able to entirely do without or greatly supplement their gas their once high gas burdens.

 

Finally, while the chemicals complex is the greatest portion of the U.S. industrial sector consuming natural gas and while the polyethylenes and other domestically produces thermoplastics could see a contraction in consumption, a large portion of this offset could itself be offset via greater a demand from ammonia make (fertilizer) as the government subsidized green fuels movement continues to bloom.

I don't think too much can be made out of the fact that the industrial consumers have already cut their gas consumption via efficiency and substitution efforts and that rising demands placed on fertilizer consumption may offset any industrial slippage unless we see a protracted down turn.

Finally, Electrical demand is rising. Wyoming pointed out a story detailing potential constraints on nuclear generation in the year ahead and these have cropped in the past but look to be increasingly impactful in the future. As coal and nuclear capacity are stretched to the limit of their capacities the call for incremental generation increasingly goes to natural gas.

So, while a protracted recession could have a minor impact on industrial demand, the rest of demand is just as likely to rise and in such a way that begins to reduce or at least retard the amount of gas that is injected during the summer refill season even as production dribbles 1 to 2% higher per year.