Industrial demand for natgas is worse than December.
When yesterday’s (Wednesday's) Industrial Production (IP) numbers were released by the Fed, we were underwhelmed, and it seems the market was equally nonplussed: Prices were unchanged 15 minutes after the release and just 7 cents higher an hour later. Normally, the IP numbers are strong indicators and push the market in either direction, so what gives?
We believe the IP figures failed to provide any surprises, the slight increase fell in line with analyst expectations and any conclusions drawn from yesterday’s figures could have been drawn weeks ago with the factory orders and non-farm payrolls numbers. That conclusion being: The economy recovered at the tail end of last year, but that recovery is slowing to a crawl.
Consider that total industrial production saw a 0.9% month-on-month increase for January, beating analyst expectations of 0.7%.
But that calculation only holds because the Fed revised December’s IP number 0.2% lower. Without that revision, production rose by 0.7%, right in line with expectations.
What’s worse, the revisions didn’t stop with December. November was retro-actively downgraded 0.2%, October by 0.2%, September by 0.2% and August by 0.1%. Just like the discrepancy in unemployment figures, the last five (!) months were actually worse than the government initially calculated.
Regardless of the revisions, the total IP index is at its highest point in a year, 1% above January 2009. That’s a recovery, but at 101.0516 the index is 6.5% below January 2004-08 and a full 10% below its peak in 2008.
That’s a slow recovery. A similar story plays out on the breakdown. Electric and gas utilities saw a weather-related boost but it was a tiny 0.6%, especially in comparison to the 6% increase between November and December.
When we last looked at chemical production and the implied positive knock-on for natural gas demand ( — January 26, 2010) we considered it one of the strongest performing sectors of the economy, stating:
“Production of chemical products was more bullish, November’s 1.6% increase was almost matched by December 1.3% increase. Capacity utilization remains well above 2008 levels and increasingly strong relative to the 2003-07 timestep, the deficit narrowed from 2.8% in November to 2.3% in December.”
Well, bad news. Chemical production was revised 1.3% lower for December and 0.7% lower for November, muting those bullish increases. Instead of contracting, the capacity utilization deficit actually widened to 3.1%. What’s more, January’s value of 108.9629 is lower than the primary release for December — 109.67. Put simply, industrial demand for natural gas is worse off today than in December.
On a more positive note, factory orders of primary metals saw a large 8.1% increase in December and manufacturing payrolls rose in January for the first time since January 2007. In line with these increases, December’s IP of primary metals was revised 4.3% higher, from 78.14 to 81.51.
So when January’s number clocks in at 81.94, it can be considered strong, if a little sluggish in comparison. Capacity utilization also rose 4.3% and, as of January, is at its highest point since October 2008.
The bottom line is this was a mixed report. Chemical production was down, metals were up and total production was exactly where everyone expected it to be. Given the sheer force of weather this month, analysts at believe there is significant upside potential for production by electric and gas utilities in February.
But until then, natty traders will have to look elsewhere for market making (or breaking) data… or they can just do what the guys in the WTI pit do… they can make it up as they go along.
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.