2014 April 4

The Master Resource Report 2014-04-04

Natural gas prices: Do they reflect reality?

Based on reports in the Wall Street Journal there is nothing to worry about since surging supply from shale gas will ride to the rescue before next winter.

WSJ: With forecasts now indicating the bulk of the extraordinary cold U.S. winter is over, analysts are expecting the heating-related phase of withdrawals from stored inventories to end soon. They see one or perhaps two more supply declines in weekly data released by the U.S. Energy Information Administration–and the potential for huge supply increases during the summer months thanks to robust U.S. shale production.

Next week’s report will look into this further and try to develop some scenarios based on the data and not the short-term views of futures traders. For now let us just say that we have our concerns.

US gasoline demand

After being depressed by the extreme winter weather experienced across much of the US this winter it appears gasoline demand is rebounding. The trailing four week average reported by the EIA this week has demand up 326,000 barrels per day over last year at 8.79 million barrels per day.

It will be important to see if demand continues to rebound and climb back towards the 9 million barrel per day level. If along with an improving economy US gasoline consumption begins to climb ending the 2008-09 recession induced decline it could upend projections of continued consumption declines in the US.

At the all-time peak in US demand during the 2006 and 2007 US gasoline consumption averaged 9.3 million barrels per day. Current US gasoline consumption is running about 460,000 barrels per day behind those peak years. The average since 2004 is 9.0 million barrels per day so today’s demand remains only 240,000 barrels per day below that slightly longer-term average. To move back to that average since 2004 would only require a 2.7% move up in consumption. Reaching the 2006-07 peak would require a much more robust 5.2% growth in demand.

When thinking about the peak demand volumes seen in 2006 and 2007 remember that the US economy was running on financial steroids that ultimately led to the financial crisis. Using that two year period as the benchmark to measure shifts in US demand for liquids fuels will tend to overstate the decline in fundamental consumption.