Gas utilities and marketers are on the cusp of a brief but potentially painful drop in industrial gas demand following a plunge in U.S. manufacturing activity and forecasts of continued constraints on factory floors.

Recent economic data suggest the COVID-19 pandemic has already pushed the U.S. into recession. While consumer-facing industries such as restaurants and hotels have been most impacted, the nation's industrial operators are not immune.

That is a major concern for gas demand because the industrial sector is the second-largest gas consumer after the electric power industry. Industrial customers accounted for nearly 30% of U.S. volumes delivered to consumers in 2019, according to the U.S. Energy Information Administration.

IHS Markit on March 24 reported its Manufacturing Purchasing Managers' Index, or PMI — a gauge of business conditions at factories — fell to a more than 10-year low at 49.2. A reading below 50 signals contraction. Output fell on weak client demand, lost exports and supply shortages.

"The March PMI is roughly indicative of GDP falling at an annualized rate approaching 5%, but the increasing number of virus-fighting lockdowns and closures mean the second quarter will likely see a far steeper rate of decline," Chris Williamson, chief business economist at IHS Markit, said in a statement.

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Goldman Sachs has forecast that the U.S. GDP will contract 3.8% in 2020, with economic activity bottoming out in the second quarter. That is also when Goldman projects the steepest drop in gas demand, particularly in the industrial and electric power sector.

"Although the current containment measures to slow the spread of COVID-19 in the U.S. impact services and transportation more visibly than manufacturing, the depth of the slowdown in economic activity and the risk that more manufacturing sites shut down suggest the impact on industrial demand for natural gas will likely be larger than during the financial crisis, though not lasting nearly as long," Goldman analysts Samantha Dart and Damien Courvalin said in a March 24 research note.

The analysts forecast that coronavirus-related disruptions will wipe out about 2.5 Bcf/d of industrial demand in April and May, relative to what demand was previously expected to be during that time. They see demand recovering through September and converging with their prior 2020 forecast by October.

Industrial demand for natural gas is highest in the U.S. Gulf Coast region and Midwest, according to S&P Global Platts and Goldman Sachs. Texas alone accounts for 22% of industrial gas demand, while the Southeast and Midcontinent regions' shares are 27% and 24%, respectively.

Dallas-based Atmos Energy Corp., which operates in eight states from Virginia to Colorado, recently highlighted industrial customers as key growth drivers.

"Natural gas is an important driver of economic growth in this country, and we have seen our industrial business grow in our Kentucky mid-states and Mississippi divisions, particularly in the automotive manufacturing sector and in the spirits industry," Atmos President and CEO John Kevin Akers said on a Feb. 5 earnings conference call.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.