Bloomberg News

Industry Gas Use Shows Slowest Growth Since 2009: Energy Markets

October 12, 2011

Oct. 12 (Bloomberg) -- A decline in U.S. manufacturing capacity is causing industrial demand for natural gas to grow at the slowest pace in three years, pushing down prices as production heads toward a record.

Industrial gas use may rise 0.8 percent in 2012, the smallest gain since 2009, when consumption declined during the recession, Energy Department data show. Gas demand among manufacturers in 2012 will be 21 percent below the high reached in 1997, according to the department.

U.S. capacity utilization, which measures the amount of an industrial plant in use, has dropped 12 percentage points since 1967, Federal Reserve data show. Factory payrolls have slid 40 percent since reaching a record in June 1979, while employment at service providers has jumped 74 percent, according to Labor Department data.

“The growing service sector and increasing efficiencies in the manufacturing process are major factors that could ease industrial production,” said Brian Swan, an analyst at Summit Energy in Louisville, Kentucky, a subsidiary of Schneider Electric SA, who correctly predicted that gas prices would fall in the third quarter. “Manufacturers would cut back on natural gas consumption.”

Gas production may rise 6 percent this year to an all-time high of 65.99 billion cubic feet a day as output from shale formations gains, Energy Department estimates show. Prices have dropped 21 percent this year and declined 16 percent in the third quarter, the biggest drop since the first quarter of 2010.

Falling Prices

Futures are down 78 percent from a record $15.78 in December 2005 and may average less than $5 in 2012 for a fourth straight year, according to the median of 10 analyst estimates compiled by Bloomberg.

Gas futures for November delivery fell 12.7 cents, or 3.5 percent, to settle at $3.489 per million British thermal units on the New York Mercantile Exchange, after rising 2.1 percent yesterday.

About 27 percent of gas demand will come from factories, chemical plants and manufacturers this year, down from 37 percent in 1997, according to Energy Department data.

Gas prices surged as much as ninefold during the past decade, compelling some U.S. companies with gas-intensive manufacturing processes to move operations overseas, said Walter Zimmermann, chief technical analyst at the brokerage United-ICAP in Jersey City, New Jersey.

“After gas prices spiked to $15 in 2005, any gas-intensive industry that wasn’t nailed to the bedrock got up and moved offshore,” Zimmerman said. “You can’t expect the industry to come back just because we’ve had two years of stable prices in a history replete with volatility.”

Weakening Demand

Industrial demand will probably increase about 2 percent a year as the economy struggles to grow in 2011 and 2012 after jumping 7 percent last year, according to Bank of America Corp.

U.S. capacity utilization was 77.4 percent in August, compared with the average of 79.5 percent over the past 20 years, a Fed report on Sept. 15 showed. The Dow Jones Industrial Average slid 12 percent in the third quarter on concern that the U.S. will face another recession.

“While domestic supply growth is steaming ahead relentlessly, demand is set to slow down cyclically, in line with the economy,” Francisco Blanch, a Bank of America analyst based in New York, said in a note to clients Aug. 19. Blanch was the most accurate gas price forecaster for the eight consecutive quarters ended June 30, according to Bloomberg rankings.

“We don’t see natural gas consumption as being extremely strong due to the weak economic environment,” Blanch said in a telephone interview yesterday.

Fed Action

The Federal Reserve announced plans on Sept. 21 to replace $400 billion of Treasuries in its portfolio with longer-term debt in a move to bolster employment and said there are “significant downside risks” to the U.S. economic outlook.

“Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow,” the Fed said in a statement. “Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.”

U.S. gas supply growth has been “simply astonishing,” Bank of America said in the Aug. 19 note. The gas market may be oversupplied over the next few months until producers reduce drilling in rock formations including Marcellus Shale and the Eagle Ford Shale in Texas, according to the bank.

The Marcellus Shale, located in the U.S. Northeast, and Eagle Ford contain natural gas, which is obtained through hydraulic fracturing, a technique in which millions of gallons of water, sand and chemicals are pumped underground to break apart the rock,

The break-even price for gas output in parts of the Marcellus and Eagle Ford developments has fallen below $3 per million Btu as improved drilling technology and higher crude prices support gas production, according to the Bank of America research note. Natural gas is often produced as a byproduct of oil output.

If the U.S. economy falls into a recession, gas consumption may contract by 0.1 billion cubic feet per day in 2012, compared with a base case of a 2.3 billion per day expansion, the bank said.

--With assistance from Shobhana Chandra in Washington. Editors: Bill Banker, Dan Stets

To contact the reporter on this story: Christine Buurma in New York at

To contact the editor responsible for this story: Dan Stets at

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