Over The Barrel:  Focus on Natural Gas Primer - Demand Considerations

The U.S. is the largest user of natural gas, accounting for over one fifth of the world's consumption.  Although more expensive than coal on a BTU basis, natural gas is favored due to its friendlier pollution profile compared to both oil and coal.  As environmental issues become more pressing, particularly in developing countries, the price competitiveness of natural gas might improve versus other forms of fossil energy due to the lower environmental costs associated with its use.

The largest user of natural gas in the U.S. is the industrial sector, which accounts for up to 32 percent of total U.S. demand. Natural gas is used in a multitude of ways, including as a base ingredient for fertilizer and plastics. It is also utilized extensively in the pulp, paper, metals, chemicals and food processing industries. In addition, natural gas is being used more frequently as a source of both heat and power in newer high efficiency units known as Combined Heat and Power (CHP) Systems, whereby natural gas is used to produce electricity, and the excess heat and steam produced in this process is used for other industrial applications, such as powering industrial boilers or for space and water heating. Usage rates are highly contingent upon a number of factors including the price of competing fuels along with the pace of economic growth.

Another active use of natural gas in the U.S. is for electrical generation. Currently, this sector consumes as much as 26 percent of the natural gas used in the U.S., generating 16 percent of the electricity we produce.  Although more expensive than coal, the lower level of pollutants associated with natural gas, particularly amidst calls for controls on carbon emissions, makes natural gas an attractive alternative.  This can be even more advantageous when coupled with economic incentives on emissions compliance. Another attraction of natural gas for electrical generation is the flexibility of the units and the speed with which they can be started up, making them ideal for use during short term spikes in electrical needs when peak loads are reached and power generation needs to be supplemented.

Residential usage (for heating, cooking, cooling etc.) is the third largest consuming sector for natural gas at 21.6 percent.  Although price has a modest impact on usage, the primary determinant is weather as it relates to cooling and heating. With electricity the primary alternative, it's usage in new construction will be contingent upon its price competitiveness. In addition, with populations moving to warmer climates the emphasis on cooling rather than heating will tend to favor electricity at this point.

Other uses of natural gas include drilling operations, where it provides the energy needed to run wells and transport the gas, but this is significantly less of a factor than usage rates mentioned above. Usage in transportation is currently inconsequential at .3 percent, but has room to grow, particularly if efforts at reducing carbon emissions are more forcefully enacted in the U.S. and prospectively overseas as well.

In December 2007 overall consumption rates were well above year ago levels reaching 73.15 bcf/d compared to 68.25 bcf/d in 2006, an increase of 7.2 percent.  January, 2007 is tentatively indicated at 81.88 bcf/d compared to 79.19 bcf/d a year ago. Factors accounting for the increase included colder temps and also an increase in commercial use in electrical power generation due to the widening gap between nat gas and petroleum. This favorable price relationship should continue to underpin values of nat gas. Tightness could become even more apparent, particularly if cooling degree days rise above normal this summer, necessitating greater cooling usage.

To obtain additional Research or receive a free trial of Over The Barrel,  please contact the authors at 1.877.377.7931 or stephen.platt@archerfinancials.com or mike.mcelroy@archerfinancials.com.

The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation.  The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition.  The information and comments contained herein is provided by ADM Investor Services, Inc. and not Archer Daniels Midland Company.  Copyright © ADM Investor Services, Inc.

Charts Courtesy of DTN