Bob’s Blog – Discretionary Spending

For the week ending September 4 2020, according to the Energy Information Administration (eia.gov) the natural gas futures price was $2.588/MMBtu. For the corresponding week, a year earlier, the same commodities future was $2.496/MMBtu.

In the US we produce about 35 quadrillion Btus of natural gas per year. About 90% of that is consumed here. Of that which is consumed here, about 3% is used in transportation. The rest is split evenly between electrical power generation, industrial usage, and in residential and commercial real estate.

Unless you count adjusting your thermostat, more than 97% of domestic natural gas consumption is non-discretionary. Residential and commercial heating usage peaks in the winter. Electric generation usage peaks when the A/C is running. Spring and fall are cyclically lower consumption periods, so sustaining the price at the end of summer indicates it’s not a peaky event.

Some have written about risk associated with availability of sufficient storage to accommodate the ebbs and flows of consumption, due to a slight uptick in the deposits last week. We are heading into the heating season, where the majority of residential and commercial (not industrial) utilization occurs. Given the non-discretionary nature of warm buildings and hot water, we need a bit of an uptick put up to ensure a consistently priced supply throughout the heating season.
Also, according to the EIA, about two thirds of the marketed natural gas produced in the US is from fracked wells, a higher percentage that of crude oil. According to geology.com, the typical fracked well decline curve is about 80% through 18 months. Most of our domestic consumption is on track to grow. Bloomberg reports, associated with Kuwait doubling of capacity to IMPORT LNG into the region, that global demand is expected to more than double by 2035.

Fewer rigs fracking now than in the recent past, coupled with the typical new well production character, come together to create a decline curve event. Production everywhere except the Permian is slumping, and the Permian is not far behind. Our pipeline projects are coming on line, the global market consumption is growing steadily, and we’re going to have lower production. If you can lead the duck, there’s an opportunity here.

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