'Incredible' Gas Demand Drop Led by Industrials

An "absolutely incredible" 9 to 12 Bcf/d reduction in natural gas demand over the last six weeks, led by industrial users who have either switched or shut down production, has been the prime mover in the recent decline in storage withdrawals, according to a report by Raymond James Energy analysts. A continued rout of industrials could bring with it a significant reduction in overall industrial output and a recession.

The 8-14% reduction in demand, coupled with a 5 Bcf/d or 3% increase in supply, translates to "about a 14 Bcf/d (or 17%) swing in both supply and demand variables as gas prices exploded."

Of the total demand reduction, "it is incredible that a 5 to 7 Bcf/d reduction in industrial consumption in gas represents a 25% to 35% reduction in gas-related industrial output. The obvious question that arises is how long can these industrial consumers of natural gas remain shut down until it begins to have a significant impact on inflation and the overall economy?" the St. Petersburg, FL-based Raymond James analysts ask.

Using the ammonia industry as a case in point, the report notes that as ammonia plants shut down in response to rising natural gas prices, the price of ammonia went up to the point where "ammonia is now looking economically feasible at gas prices of $7-$8/Mcf. In fact, recent indications from ammonia companies suggest that they are already beginning to bring more ammonia plants back online." Since other industries could follow the same pattern, Raymond James predicts the long-term loss of the industrial market should be more like 10% to 20% (2-4 Bcf/d), rather than the current 25-35%. But even this "implies a meaningful hit to the U.S. economy."

Noting that some of the additional supply brought on for the winter is not sustainable, the group projects additional supplies through the rest of the year will be in the neighborhood of 2 Bcf/d. It concludes that "only about 7 Bcf/d of the current 14 Bcf/d changes in the gas supply/demand equation are in fact sustainable as we move through 2001."

This "implies that we may be able to inject 1,200 to 1,400 Bcf more gas into storage than we did last summer. By itself this would likely be sufficient to drive gas prices back down to the sub-$4 level." But there is a caveat - new gas-fired power generation is likely to offset much of the sustainable supply/demand changes. "We believe that the current U.S. power situation will drive gas demand up another 6 Bcf/d this next summer. This means that U.S. gas markets this summer may only be able to inject 200 to 300 Bcf more than last summer," The Raymond James report states. "We still expect continued tight gas markets through 2001."

Ellen Beswick

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