Declining U.S. natural gas prices have a champion in the petrochemical and fertilizer industries, and the lower prices may increase U.S. industrial production (IP) within those sectors, according to a report by Barclays Capital.

In sharp contrast to weather-induced volatility from heating and cooling natural gas demands, the resilience of U.S. IP has led to steady demand from the chemical subsectors such as petrochemicals and fertilizer manufacturers, said energy analysts Michael Zenker and George Hopley in a report to clients.

“The cost advantage to North American petrochemical feedstock production based on natural gas remains significant in the short term, especially as crude and refined product prices stay near current levels,” wrote the duo. “We expect overall levels in U.S. GDP [gross domestic product] to guide IP growth and therefore industrial gas usage.”

Until recently U.S. industrial natural gas use was the largest component of gas demand on an annual average basis, they noted.

“However, in any particular season, it is typically the weather and its impact on consumer demand for heating or cooling that gathers the most attention and assumes the leading role in price formation,” said Zenker and Hopley. “Not only is weather ubiquitous, but there is no shortage of observations or forecasts, allowing everyone to add their two cents. In contrast, data on industrial demand come sparingly, rarely in a format that resonates beyond the anecdotal observation, meaning forecasts for aggregate trends can break down when applied to individual industries.”

The analysts’ research focused on the industrial segment that “matters most” to gas markets: the petrochemical and fertilizer industries. In contrast to the declines in total industrial gas burn over the past several years, some sectors have evolved and have increased their gas demand year/year, with the “clearest example” being the chemical industry, including ethylene and fertilizer. Using more than 6 Bcf/d of gas — compared with total industrial demand of 18.2 Bcf/d in 2007 — the chemical industry is the largest single industrial user in the United States, and “it also reflects the diversity of factors that influence gas demand,” said the Barclays team.

Among the reasons that fertilizer production is growing is because of U.S. mandates on ethanol. Those mandates also are increasing the use of gas, noted the analysts.

“With a push to expand U.S. production of ethanol, the resulting increase in corn acreage as the most accessible source of feedstock for ethanol has required an increase in the application of ammonia-type, nitrogen-based fertilizers,” said Zenker and Hopley. “The principal feedstock for producing these ammonia-type products is natural gas.”

Domestic production of fertilizer requires more than 1 Bcf/d currently, but given the up-to-now cheaper cost of doing business oversees, the industry had sought lower cost sources of feedstock than in the United States.

“Importantly, international prices for fertilizer, which once showed a discount to U.S. markets reflecting a transportation differential, are now closer to U.S. prices, recognizing tighter markets globally as well,” they said. “Given the recent affirmation of continued ethanol mandates and higher rates of domestic ammonia production, it is likely that the demand for ammonia will remain intact in the U.S. Combined with tighter markets globally, there is an incentive now for previously shuttered domestic production to restart…A declining gas price only adds to the incentive.”

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