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Natural Gas Demand Analytics Part 2:

Does the Drop in Industrial Demand for 2015 Imply a Recession is Coming?

January 27, 2016 | By Robert Applegate, PhD

In our last episode of Natural Gas Demand Analytics we discussed the fundamentals around fuel switching from propane and fuel oil in the residential and commercial heating sector to natural gas: see “Natural Gas Demand Analytics Part 1: Residential and Commercial Demand in a Low Price Environment”

In this issue of Get the Point, we explore industrial demand on a national level as well as regionally, and then predict what will happen in the industrial sector for 2016. Before we go into the details, let’s start at 30,000 feet and explain what industrial demand is and what makes it move. 

Industrial Demand 101

First and foremost, industrial natural gas demand, just like every major demand sector, is driven by the weather. Natural gas is not only used as feedstock for industrial facilities making fertilizers or other petrochemical products, but it is also used to heat factory floors, which is why industrial demand always peaks in February.

Second, the economy drives industrial output, and thus, industrial natural gas demand is also driven by the economy. When the financial crisis in late 2008 sent the economy into a tailspin, industrial demand for natural gas fell, as seen in the Energy Information Administration (EIA) data in Figure 1.

Finally, industrial demand, like everything else, is driven by price, which can also be seen in Figure 1. When the price of gas increases, industrial demand for natural gas decreases. Something to note is that the price of gas as reported by EIA for industrial demand in 2015 is on par with 2002, and the demand is also similar at around $4.00 per thousand cubic foot (Mcf) and 20.5 million cubic feet per day (MMcf/d), respectively.

Industrial Natural Gas Demand

However, Figure 1, shows one recent period when both industrial demand and prices fell at the same time: 2014 to 2015. Some analysts have said that this slowing of demand in a low-price environment indicates an impending recession.

Using PointLogic data modeling industrial data, we can investigate to see if that is in fact the case. At the time of publication, EIA had not yet reported November or December 2015 demand numbers, but using our model we can extrapolate full-year demand. Figure 2 shows that 2014 industrial demand for gas averaged about 21.0 Bcf/d, and 2015 averaged about 20.8 Bcf/d. For 2014, the population-weighted average U.S. temperature was about 58.5 degrees, while 2015 was about 60 degrees. 

A warmer year, on average, would drive down heating demand for industrial facilities, so we see an obvious correlation in 2014-2015. But was that the full story? Did the industrial market really contract from 2014 to 2015, or was it solely a weather phenomenon? We can find out what is truly happening in the industrial sector by removing temperature from the equation.

U.S. Natural Gas Industrial Demand

Eliminating weather as a factor

As discussed in the prior Get the Point about residential and commercial demand, by plotting natural gas demand vs. temperature, we can model natural gas burn at different temperatures, and remove weather as a factor driving that sector’s demand.

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Using PointLogic’s population-weighted weather data and modeled industrial demand, we can use these graphs to see where industrial demand has grown or shrunk by region, irrespective of a warmer or colder than normal year. 

During the recovery from the recession, natural gas industrial demand has been steadily growing across the U.S., until 2015. Breaking the U.S. into PointLogic Energy regions and removing weather as a contributing factor, we can see better where those changes occurred. 

Starting in the Rockies Region, which is the smallest industrial market at around 1 Bcf/d, we can see that industrial demand fell slightly from 2014 to 2015. But looking at the burn-per-temperature graphs, there was not much of a change between the two years; therefore, the downturn must have been weather-related rather than a fundamental change in the market. One could argue that industrial demand even grew slightly between the two years. 

In the region graphs, the steady increase of industrial demand with weather removed from the equation is shown by the sloped lines moving to the right each year; that is, at a given temperature, the burn rate is usually higher each year.

Rockies Industrial Demand

Rockies Burn per Temperature

The Western Region is the next smallest, coming in at slightly above 2.5 Bcf/d, and has remained relatively flat from 2014 to 2015. The burn-per-temperature data for the West is also steady for that time span. 

Since there was no significant change, we will move on to the Northeast, where there was a slight drop in industrial demand from 2014 to 2015. Comparing the drop to the weather-normalized graph, we see again that the demand drop from 2014 to 2015 seems to only be related to weather, rather than to a shift in the market.

NE Industrial Demand

Northeast Burn per Temperature

The Southeast Region and Texas, which both have large industrial markets of around 5 Bcf/d and 4.3 Bcf/d, respectively, also saw little to no drop from 2014 to 2015. Both regions also saw burn-per-temperature lines that lie nearly on top of each other, meaning that for those markets, neither temperature nor the fundamentals of the industrial demand market changed significantly in that time. 

That leaves us with the Midcon Region, which had a larger-than-most gas demand drop from 2014 to 2015. Again, looking at the burn-per-temperature graph, we can see that 2014 and 2015 were similar years, meaning that any drop in industrial demand must have been weather related, rather than fundamental.

Midcontinent

Midcon Burn per Temperature

In the end, what does this all mean? PointLogic’s interpretation is that the drop in industrial demand is not an indicator of an impending recession, nor a slowing of the economy as some might be predicting using similar data. With normal weather, 2015 would have continued the growth of previous years.

Predicting 2016 Industrial Demand

We’re only a few weeks into 2016, but based on the previous assertions in this article, we can predict 2016 will exhibit incremental industrial natural gas demand growth.

The weather forecast for the beginning of 2016 remains within an El Nino pattern, meaning warmer than average Midcon and Northeast temperatures and cooler than average southern U. S. temperatures. The Midcon and Northeast industrial markets account for just shy of 8 Bcf/d of the market (~35%), while Texas and the Southeast account for just over 9 Bcf/d of industrial demand (or ~45%). This cooler South and warmer North weather pattern could net a small bump up in industrial demand for the beginning of 2016. 

Assuming normal weather for the remainder of 2016, industrial demand trends would put the U.S. back on track with 2014 levels. Working with data provided by our friends at Ponderosa Advisors, which conducts extensive monitoring of planned industrial projects, we are expecting about 850 MMcf/d of new industrial capacity coming online in 2016, including 10 fertilizer plants and three methanol plants. Many of the projects come online later in the year, and not all will run at 100% capacity. 

EIA’s Short Term Energy Outlook gas forecast has an increase in industrial demand of 720 MMcf/d for 2016 over 2015. At PointLogic, we are currently predicting a more conservative 300 MMcf/d of increased demand, which is above 2014 levels by about 100 MMcf/d.

Coming out of the winter with a potentially large amount of gas in storage could keep prices down, and based on the industrial project completions for 2016 could mean there is greater upside potential for the forecast. Ultimately, industrial demand will grow for the current year over 2015 levels.

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