Industrial users put the brakes on gas use

Jan. 29, 2001—High prices apparently induced industrial gas consumers to reduce demand an “incredible” 9-12 bcf/day from mid-December through January, said a Houston energy analyst.

As cold weather ramped up overall consumer demand, industrial gas consumers began shutting down plants, switched fuel, and undertook conservation measures, according to Raymond James & Associates, reducing usage 8-14%. Lower-than-expected storage withdrawals suggest the U.S. gas supply/demand equation experienced a startling 14 bcf/day swing in just the past month, according to its Monday notes on the gas market.

Such a “massive correction” implies the U.S. will have about 500 bcf in storage at winter’s end, more than analysts predicted earlier. But electric power demand is expected to help keep supplies tight for the rest of the year.

The December cold spell and high prices caused a surge in supply drawn from Canadian gas storage, while pipelines reduced pressure, adding about 1-2 bcf/day to U.S. gas supply. Combined with increased LNG imports and an intensifying hunt for gas supplies by North American producers, the winter gas supply has risen about 3% or 2 bcf/day on a year to year basis, Raymond James estimates.

Gas prices on the New York Mercantile Exchange (NYMEX), which were trading at nearly $10/Mcf, have since fallen back. The NYMEX contract closed Friday at $7.256/Mcf, down 1.4 cents.

Recent changes in the natural gas supply/demand equation have at “temporarily relieved the upward pressure upon natural gas prices,” says Marshall Adkins, director of research. But will it last?

Adkins says supply increases from Canadian storage and reductions in pipeline pressure are temporary responses that can’t be sustained and could even lead to a corresponding rise in demand come summer.

Higher LNG imports
But increased LNG imports and higher production resulting from more drilling are probably more permanent. As a result, he estimates supply will rise about 2 bcf/day this year.

But the sharp reduction in demand shows how quickly the market will respond to price signals. Adkins forecasts, depending on oil prices, fuel switching and conservation will continue to reduce demand 2 bcf/day from year ago levels through the fall.

“On the industrial demand side, however, it is very difficult to imagine a sustained 25-35% reduction in gas-fired industrial output,” he says. “Such a sustained reduction would clearly send shockwaves through the U.S. economy, as job layoffs would be immediately followed by increases in prices in the industries that have curtailed output.”

Adkins says it’s unlikely 25-35% of industrial demand will permanently disappear because of the implied impact on the U.S. economy. As fewer products from gas-fired plants become available on the market, those product prices will rise. Higher product prices, in turn, will make it economical to restart plants.

He points to ammonia as an example of how high product prices are driving the market. With nearly 40% of ammonia production off line, prices have risen nearly three-fold since 1999 and ammonia is now looking economically feasible at gas prices of $7-$9/Mcf.

Given the ammonia producers’ response, Adkins says it’s reasonable to think other gas-driven industrial concerns will respond similarly. Nevertheless, he estimates, high gas prices could dampen industrial demand by 2-4 bcf/day or “still a meaningful hit to the U.S. economy.”