Expectations of a troubled economy in 2009 shouldn't weigh too heavily on the minds of gas producers if analysts at Barclays Capital are correct in their demand projections. Demand will be weak to be sure, but not as weak as some might fear, they say.
"[A] weak economy in 2009 would cut into power sector and industrial sector demand for natural gas, but not substantially," the analysts say in a research note last Tuesday. "A return to normal weather promises to lift power sector demand in almost any case next year. For industrial demand, a decline in natural gas prices, a strong underlying core of demand and the expected continued strong performance of key industries should keep industrial demand healthy in 2009 even in a weak economy."
On the industrial side the Barclays analysts note nine key gas-burning industries: chemicals, refining, primary metals, food, paper, minerals, metal products, transport equipment and plastics. They say gas prices have a bigger effect on demand than economic growth, or the lack thereof. They also point to Energy Information Administration data that suggest first-half 2008 industrial gas demand "has remained surprisingly strong." Some of the credit goes to the fertilizer (ammonia), petrochemical, ethanol and steel industries, they say.
Looking at prices, gas is expected by Barclays to sell at a 50% or greater discount to oil on a Btu-equivalent basis during 2009-2010. "This suggests that North American-based industries that use natural gas as a feedstock and that compete with oil feedstock-driven competitors will be advantaged, such as petrochemical producers," the analysts say.
However, weaker manufacturing and construction (as it relates to building materials suppliers) sectors will see gas demand weakness, as will the pulp and paper industry as more production moves offshore.
On the power side Barclays pegs a decline in gas demand growth to an anticipated 0.8% decline in gross domestic product (GDP) growth. "With natural gas the marginal fuel for many of the power regions most of the time, the cut in electricity consumption inordinately pulls natural gas demand lower," the analysts say. "Our new baseline power sector consumption forecast for 2009 now totals 19.2 Bcf/d, or growth of 0.6 Bcf/d."
In another note last week, analysts at SunTrust Robinson Humphrey/the Gerdes Group (STRH) also say power generation demand for gas should grow year over year due to the mild summer of 2008. In the same note the STRH analysts call for a ratcheting back of domestic drilling to rebalance an oversupplied gas market (see related story).
Overall, if the economy grows at 2.5% next year in a market where gas is priced at $8.35/MMBtu -- as Barclays says it expects -- combined industrial and power demand would be 38.7 Bcf/d, representing growth of 1.9 Bcf/d, or 5%, over 2008 levels, the analysts say. "If the economy expands in 2009 at the rate expected by Barclays Capital of 0.8%, we would then forecast combined demand to reach an annual average 37.6 Bcf/d, or a modest 1.1 Bcf/d fall from the higher growth example," they say.
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