Wednesday, July 22, 2009

4. Demand

Evidence is starting to accumulate that production of goods is stabilizing. Consumption data also appears to have stabilized. According to the most recent Census report, sales did not drop between March and May. While inventories are still dropping, the underlying production levels seem to have stopped declining, and are at a level slightly below consumption levels. Again we are faced with a stock versus flow situation. The stock of goods is too high, but the flow is now negative (that is, the production of goods is lower than consumption of goods.) Unless consumption drops further, we can expect production to come up at least to the level of current sales. This point is fleshed out with a particular focus on natural gas by an investor and trader named Rob and with a tag of Robry825. For those interested in looking in more detail at the demand for natural gas, I recommend reading his weekly blog post at, and also his near-daily postings at the Investor Village CWEI message board :( for detailed and disaggregated data on demand for natural gas.
A quick comment on weather: one of the big stories in the natural gas market this summer has been the bearish weather. With the exception of several weeks of hot weather in Texas, this summer has been remarkably cool, and there has not even been the threat of tropical storms in the Gulf of Mexico. As of mid-July, we have predictions of continued unseasonably cool weather across most of the CONUS. The psychological effect of weeks and weeks of cool weather may be leading market participants to overemphasize the importance of bearish weather. Weather forecasts are only accurate to 14 days, so we could very easily have a bullish switch in weather, such as a hot August or a cool October.
In conclusion, I think that the demand side for natural gas is uncertain. There exists the possibility that goods consumption and natural gas demand will fall still further, particularly if our fate is to plunge into a deflationary depression. Barring such a worse-case scenario however, we might expect industrial demand to pick up soon, since current industrial production is below current consumption levels. This again points to a flat or negative second derivative for natural gas storage levels.

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