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Industrial demand could rise as Trump policies support oil, gas production

This article is part one of a three-part series exploring how policies under President Donald Trump could impact natural gas demand in different sectors. Part 2, which looked at the impact to demand in the power-generation sector, can be found here. Part 3, covering residential and commercial demand, can be found here.

A possible resurgence in oil and natural gas production under President Donald Trump could be met by rising industrial demand amid plans to improve infrastructure and support various industries within the U.S.

Beginning on the campaign trail, Trump has pledged he will dismantle many of the policies from the previous administration, including the Clean Power Plan and regulations that stifled growth in shale oil and natural gas production. Trump is also expected to open more federal land and water to energy development, and in doing so, his policies could mark a new era of unbridled oil and gas production.

Producers are positioning for the new era. Helped by a recovery in the price of crude oil from the Feb. 11, 2016, low of $26.21/bbl to a $54.06/bbl high on Dec. 28, 2016, and a natural gas futures price rebound from a $1.639/MMBtu low on March 3, 2016, to a high of $3.930/MMBtu on Dec. 28, 2016, fresh interest and investment is being breathed into U.S. exploration and production.

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Crude oil and natural gas rigs are returning as economic incentives drive drillers back to areas previously abandoned.

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This promise of a resurgence in production, however, must be met by rising demand or the market stands to suffer under an incongruent supply/demand balance.

For natural gas, Trump's promises to bring industry back to the U.S. could offer a significant demand-side boost.

Industrial-sector usage went through a period of contraction after peaking at 23.3 Bcf/d in 1997, as the U.S. economy suffered from the real estate and banking system crisis.

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But Trump's commitment to industry could establish a significant new demand stream.

Consumption of natural gas in the industrial sector makes up 33% of natural gas consumption and is concentrated in a relatively small number of industries that include pulp and paper, metals, chemicals, petroleum refining, stone, clay and glass, plastic, and food processing. These businesses account for more than 84% of all industrial natural gas use.

In Trump's promise to improve the U.S. infrastructure, industrial demand may be poised for a substantial boost.

"The clearest message delivered by Donald Trump in his election victory speech was a focus on greater infrastructure spending in the US," analysts with Goldman Sachs said in a commodities research note. "Without specific details it is hard to quantify the impact on commodity demand, however such policies would support steel, iron ore, zinc, nickel, diesel and cement demand in the US."

Metals prices were rallying prior to Trump's win, but the rally might have gotten an added boost from Trump's victory, according to Barclays Capital analysts. The analysts warned, however, that the main source of the metals markets support has been China's stimulus program.

U.S. and Developing Markets infrastructure spending has been stagnant since the 1970s, analyst Damien Courvalin wrote in the Goldman report. So, despite the U.S. only representing 7% of global steel demand and U.S. steel per capita consumption equating to only half of China's, this catch-up in infrastructure investment could still lead to a significant recovery in steel demand.

Still, while an infrastructure surge could boost domestic demand, "Trump's plans to introduce import tariffs on many countries and the tit-for-tat that will go with it could lead to slower world GDP growth such that the net metals demand change from a global perspective is negative," according to Michael Cohen, lead analyst for Barclays.

"Trump has promised to bring trade cases against China, but as consultants Wood Mackenzie point out, it accounts for less than 10% of US steel imports and the renegotiation of NAFTA that is also one of his targets is unlikely to make much difference since the US is a net exporter of steel to Mexico," Cohen said.

In addition to Trump's plans for the U.S. infrastructure that could boost demand for products that rely on natural gas for some phase of their production, industry also makes the appliances, electronics and even the agricultural products that we rely on every day, providing additional opportunities to grow natural gas supply to meet numerous industrial energy requirements.

On the flip side, changes in U.S. policies could discourage natural gas demand.

A reversal in U.S. commitment to renewable energy and environmental protection could, for example, negatively impact demand for agricultural products as a drop in demand for ethanol would impact demand for the corn used to make it.

"Although the campaign did not discuss biofuels, Trump's deregulation efforts could impact the Renewable Fuel Standard, which mandates biofuel consumption in the US. While policy shifts may focus on the RIN enforcement mechanism only, a change to the RFS projected biofuel targets would lead to lower US agriculture demand growth," Goldman analysts said.

Pulling out of trade agreements and imposing tariffs on imported goods could have similar negative impacts on demand for the products that require natural gas to produce them and thus negatively impact industrial natural gas demand.