The Guest Blog

Schork Oil Outlook: NatGas Should Be Rising—Right?

Stephen Schork, Editor, The Schork Report

Factory overtime, while stagnant in December, has been trending in the right direction since the spring nadir, as noted in the January 1 issue of .

Better still, the nation’s blast furnaces are hotting up. Over the past twelve months (as of November 2009), average hourly earnings for workers at U.S. steel mills has risen by 11.1%, but average weekly earnings has jumped by 14.6%, reflecting an increase in the average workweek from 41.7 hours to 43 hours.

However, as we saw on Tuesday with U.S. Steel’s 4Q earnings disappointment, the industry still has a lot of ground to make up. The company posted a fourth quarter loss of $267 million. For 2009 as a whole, the company lost $1.4 billion, as opposed to a profit of $2.1 billion in 2008.

Per the company’s statement, U.S. Steel is making steel at six of its seven North American steelmaking locations. The Lake Erie Works, which represents 10% of flat-rolled raw steel capability, remains cold as demand from the automotive industry remains cold.

In the fourth quarter the company ran its North American mills at 64.2%. That is up from 57.9% in the third quarter and 44.7% in the fourth quarter 2008. For 2009 as whole utilization was only 48.2% versus 79% in 2008. As such, the company has had to scale back its consumption of natural gas.

Per their 2008 annual report, U.S. Steel consumed the equivalent of 11,000 NYMEX Henry Hub futures contracts. However, in their third quarter 2009 10-Q filing, the company reported reduced natural gas consumption of approximately 550 NYMEX contracts or 5.5 Bcf. And, that is just U.S. Steel.

According to the Fed, U.S. steel mills operated at 59.9 per cent of capacity at the end of 2009. The long-term average utilization is around 85 per cent. That is a lot of missing demand that still has to be replaced. Looking forward, U.S. Steel expects to complete maintenance on its largest blast furnace (#14) at the Gary (Indiana) Works in the first quarter. Thus, demand for gas will rise in accord.

Furthermore, while demand for flat-rolled steel remains tenuous given the questionable state of the U.S. auto industry, the company notes strong demand for tubular steel “… due in part to the continuing development of shale natural gas resources.”

What’s more, the White House’s shifting focus away from health care and onto jobs bodes well.

Obama’s “green jobs” speech on January 8, followed by Wednesday’s SOTU speech, emphasized the rebuilding of the country’s infrastructure. It takes a lot of natural gas to manufacture all of the concrete and steel that is required to rebuild the nation’s rails, roads, bridges and — if the president is to be believed — nuclear power plants.

This all seems reasonably bullish for steel and by extension industrial demand for natural gas. However, after first highlighted this directional trend, the NYSE’s Arca Steel Index peaked and is now falling. So, despite good potential news on industrial demand, nat gas is not reacting.


Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.