A decline in U.S. manufacturing capacity is causing industrial demand for natural gas to grow at the slowest pace in three years, pushing down prices as production heads toward a record.
Industrial gas use may rise 0.8 percent in 2012, the smallest gain since 2009, when consumption declined during the recession, Energy Department data show. Gas demand among manufacturers in 2012 will be 21 percent below the high reached in 1997, according to the department.
U.S. capacity utilization, which measures the amount of an industrial plant in use, has dropped 12 percentage points since 1967, Federal Reserve data show. Factory payrolls have slid 40 percent since reaching a record in June 1979, while employment at service providers has jumped 74 percent, according to Labor Department data.
“The growing service sector and increasing efficiencies in the manufacturing process are major factors that could ease industrial production,” said Brian Swan, an analyst at Summit Energy in Louisville, Ky., a subsidiary of Schneider Electric SA, who correctly predicted that gas prices would fall in the third quarter. “Manufacturers would cut back on natural gas consumption.”
Gas production may rise 6 percent this year to an all-time high of 65.99 billion cubic feet a day as output from shale formations gains, Energy Department estimates show. Prices have dropped 21 percent this year and declined 16 percent in the third quarter, the biggest drop since the first quarter of 2010.
Futures are down 78 percent from a record $15.78 in December 2005 and may average less than $5 in 2012 for a fourth straight year, according to the median of 10 analyst estimates compiled by Bloomberg.
About 27 percent of gas demand will come from factories, chemical plants and manufacturers this year, down from 37 percent in 1997, according to Energy Department data.
Gas prices surged as much as ninefold during the past decade, compelling some U.S. companies with gas-intensive manufacturing processes to move operations overseas, said Walter Zimmermann, chief technical analyst at the brokerage United-ICAP in Jersey City, N.J.