We had our eye on Natural Gas last week. The spike in NG futures late in Friday’s session was clearly a short covering event for some hedge funds that had successfully ridden the -30% July decline into the new month (see charts 1-2). There has been a general sense of calm in the market (see chart 3) after EIA inventory stats that came in on Thursday without any major surprises (Chart 4) and the lack of any major storms in the gulf so far this season.
It is important to note that historically NG has risen between July and October due to normal seasonal demand.
Besides any potential storm disruptions, we remain focused on price action in NG’s sister commodities (NG’s recent decline relative to the price of oil could spur utilities that have the capacity to switch) and, in the long term, what a sharp decline in US industrial manufacturing will mean for electricity demand.
The EIA estimated electricity consumed by manufacturing in the US at 964,112 Gwh in 02 (the last year available), which would equal over 23% of the total electricity generated in the US last year (based on estimates by the Edison Institute). Metal, metal fabrication and automotive manufacturing rank among the major domestic power hogs and we think that structural changes in US electricity consumption spurred by diminished output in these sectors could lead to further widening of the price correlation between NG & oil. Of course all that is meaningless in the near term –particularly if we experience a hurricane force supply shock.