Daily Energy Report

US industrial demand for natural gas, OPEC monthly report, northern Iraqi crude exports, oil explorations funding, China’s Russian oil imports, Lebanon’s stalled gas deal, and more

CHART OF THE DAY

US Industrial Demand Has to Increase to Support Natural Gas Prices

Commentary

The major activities that highly consume natural gas are found in the petrochemical and petroleum refining industries.

The petrochemical industry is the largest natural gas consumer. Aside from being used for electricity and heat, natural gas is also used as a feedstock to produce three products essential for the economy: fertilizers, methanol, and hydrogen (anything that is related to grey and blue hydrogen comes from natural gas).

The production of methanol, which is necessary to produce other products, has increased markedly in recent years, leading to growth in the industrial sector’s demand for natural gas.

 In general, the demand for natural gas in the industrial sector is seasonal. For instance, demand peaks in winter because of the additional need for heating. The seasonal changes in demand in the industrial sector, however, are less than in other sectors.

Figure (1) above shows trends in the demand for natural gas in the US industrial sector since 2018.  Although the COVID-19-related lockdowns in 2020 led to declines, demand for natural gas later rebounded and kept increasing in the following years.  In early 2023, demand declined as expected by various groups, including the US Energy Information Administration (EIA). But in general, the industrial sector’s demand for natural gas has been steadily increasing since 2009— when the financial crisis ended. Most of the growth has been driven by methanol production, as we noted above, and by oil refineries, as they switched to natural gas between 2015 and 2021.   

EOA’s Main Takeaway

Natural gas demand growth in the US industrial sector is important to support prices since the sector consumes about a quarter of total US gas consumption.  The growth in demand since 2009 is notable because it reversed a historical trend when it was constantly declining as many believed the US was running out of natural gas and that prices were going to maintain an upward trend. But then several factories shut and moved operations to China, and other regions.  

According to the EIA, industrial demand for natural gas grew by an average of 2% in 2021, and 1.9% in 2022 which was lower than expectations.  As for 2023, the EIA expects a decline of 4%. The drop in the first two months of this year was slightly higher due to a decline in manufacturing activities (also related to higher interest rates and higher dollar), and flat production of fertilizers.

The problem is that if global LNG demand increases and LNG prices hit new records, this would increase the potential for higher natural gas, which in turn will lower industrial demand. In short, with higher LNG prices there won’t only be a competition between Asia and Europe for natural gas, but also a competition between demand from the US industrial sector for domestic gas and international demand for US LNG.

Relatedly, higher natural gas prices will increase refining costs and reduce margins while utilities will switch back to coal. The end result is higher costs, inflation, fewer economic activities, and higher greenhouse gas emissions.

STORY OF THE DAY

OPEC MONTHLY OIL MARKET REPORT: World oil demand growth, Non-Opec output growth remain unchanged from April

PLATTS SURVEY: OPEC+ crude production down in April on disruptions in Iraq, Nigeria: Platts survey

Summary:

In its monthly report released today, OPEC kept the world oil demand growth estimate for 2023

virtually unchanged at 2.3 million barrels per day (mb/d), with minor adjustments due to improvements in China's economy.

"Minor upward adjustments were made due to the better-than-expected performance in China’s economy, while other regions are expected to see slight declines, due to economic challenges that are likely to weigh on oil demand," OPEC said in its report.

Meanwhile, non-OPEC liquids production growth was also kept unchanged from April's assessment, standing at 1.4 mb/d YoY, the report said, noting that the US, Norway, Kazakhstan, Canada, and Guyana are the "key drivers of liquids supply", while supply drops are mainly expected to be registered in sanctioned Russia.

"Uncertainties remain, primarily related to the potential of US shale oil output and unplanned field maintenance in 2023," OPEC said in its report.

Regarding OPEC's 13 member producers’ crude oil production in April, the report said it decreased by 191,000 b/d MoM to an average of 28.60 mb/d, based on secondary sources.

Meanwhile, a recent Platts survey by S&P Global Commodity Insights shows OPEC-13 pumped 28.60 million b/d in April, down by 370,000 b/d compared to March, while the output of non-OPEC allies fell by 10,000 b/d to 13.39 million b/d. The drop was attributed to the ongoing suspension of crude oil exports from northern Iraq via Turkey's Ceyhan port, and oil outages in Nigeria. 

EOA’s Main Takeaway: