For all the talk about weak weather-driven demand in 2023, a buoyant U.S. economy may complement mounting global energy needs and provide a key pillar of strength for natural gas markets in the form of steady industrial demand in the new year.
Over much of 2023, elevated inflation and the Federal Reserve’s (Fed) aggressive interest rate hikes to tame it loomed large over the economy, generating the specter of a recession that market participants worried would dampen industrial activity and the sector’s energy needs.
But the economy proved resilient, shrugging off the impacts of rates – slower borrowing and lighter investment activity – and industrial natural gas demand proved durable. Industrial consumption of gas in December, for example, has held in a 24-25 Bcf/d range, on par with a year earlier. Wood Mackenzie on Monday estimated industrial demand would hover around 24.6 Bcf/d this week. It averaged 24.7 Bcf/d over the prior three days, up 0.2 Bcf/d from a year earlier.
The reliability of industrial demand is important because, according to Energy Information Administration (EIA) data, it grew 2% in both 2021 and 2022. The momentum reflects industrial sector expansion in recent years in key regions such as the Midwest and Northeast, according to EIA, as well as an increased preference for natural gas over other energy sources such as coal.
“This kind of energy demand certainly plays into a best-case scenario for the economy and the gas industry,” Jacob Thompson, managing director at Samco Capital Markets, told NGI.
At issue: The U.S. consumer price index (CPI) hit a 40-year high last year, driven in large part by soaring energy costs, including a doubling of natural gas prices in summer 2022. Russia’s war in Ukraine and the Kremlin’s related pullback on gas deliveries to Europe – as well as Western sanctions against Russia – exacerbated already precarious supply levels on the continent. This bolstered demand for LNG from the United States and elsewhere and sent prices surging.
But Europe has since stocked up on liquefied natural gas, and weather in 2023 proved relatively benign from a natural gas price perspective. Additionally, soaring natural gas and oil production levels in the Lower 48 – both reached record levels this year – have eclipsed domestic demand and dampened energy prices. Natural gas production reached an all-time high above 106 Bcf/d in November and again topped that threshold multiple times in early December, according to Wood Mackenzie.
The January natural gas futures contract has trended upward in recent sessions, but it has come off seasonal lows and has traded this month at roughly half the value of a year earlier. NGI’s December Bidweek National Avg. clocked in at $3.325/MMBtu, less than half the year-earlier average of $8.395.
Falling energy prices in concert with 11 Federal Reserve interest rate hikes between early 2022 and the middle of this year largely tamed inflation, according to Fed officials. The CPI increased 3.1% in the 12-month period through November. That was down from 3.2% the prior month, 6.5% at the end of 2022 and 9.1% at its peak last year.
Of course, this proved detrimental for natural gas bulls, as evidenced by the price swoons of late. But diminished inflation pressure has enabled the broader economy to keep growing, despite fears that lofty borrowing costs would tilt it into a recession.
“Inflation has eased from its highs, and this has come without a significant increase in unemployment,” said Fed Chair Jerome Powell at a press conference this month. “That’s very good news.”
The United States increased job totals every month this year through November and the economy grew at a 4.9% seasonally adjusted annual rate in the third quarter, according to the Commerce Department. That was more than double the 2.1% rate of the prior quarter. The jobless rate last month declined to 3.7% from 3.9% in October. The unemployment rate has held below 4% for 22 consecutive months, the longest stretch since the 1960s.
Against that backdrop, Fed policymakers at their meeting this month decided for a third time since July against further rate increases. Economists say the Fed is now highly unlikely to further raise rates. In fact, based on commentary and data from Powell and his colleagues following their December meeting last week, futures markets now expect at least three rate cuts next year, according to Raymond James Financial Inc.’s Chief Economist Eugenio Alemán.
“It is clear that unless a surprise with inflation occurs, the Fed is done increasing interest rates during this tightening cycle,” Alemán said.
The benchmark federal funds rate target range stands at 5.25%-5.50%. Since June, the Fed boosted rates just once – a 25 basis-point hike in July – which brought 2023’s cumulative total increase to 100 basis points. That marked a dramatic slowdown from 425 basis points of hikes last year and substantially eased a bearish economic overhang, Alemán said.
All of that noted, DBRS Morningstar analysts expect mild winter weather in December and robust production to keep natural gas prices in check early in 2024. But they expect economic vigor and lower prices to drive mounting gas demand and, by extension, Henry Hub prices as the year unfolds.
“As we progress through 2024, we expect the U.S. supply/demand balance to gradually tighten as low gas prices tend to discourage new production while, simultaneously, incentivizing more demand,” the DBRS analysts said.
