Natural Gas Forecast: How Will Weather, Production, LNG Demand Impact Market?

Key Points

• U.S. natural gas prices hit a two-week low due to warmer forecasts.
• January’s gas output in Lower 48 states fell, recovery expected.
• Warmer weather pattern predicted to reduce natural gas demand.
• European market’s stability and Biden’s policy impact U.S. LNG exports.

US Natural Gas Market Recap

Last week, U.S. natural gas prices dropped to a two-week low, influenced by forecasts for warmer weather in late January and early February. The front-month futures contract posted its lowest close since January 2, culminating in a weekly decline of nearly 24% – the biggest weekly percentage drop since February 2023.

Natural gas futures settled at $2.519, down $0.794 or -23.97%.

Supply and Demand Trends

Financial company LSEG reported that average gas output in the Lower 48 states fell to 102.9 billion cubic feet per day (bcfd) in January, down from December’s record of 108.0 bcfd. Despite a temporary plunge due to freeze-offs, U.S. gas output was on track to recover. Meanwhile, gas flows to major U.S. LNG export plants averaged 13.9 bcfd in January, a decrease from December’s record of 14.7 bcfd.

Weather Impact

According to NatGasWeather, a frigid cold front sweeping across the U.S. resulted in very strong demand through Sunday. However, forecasts for a much warmer pattern from January 22 to February 2 led to plunging natural gas prices due to expected light demand.

EIA Report

The EIA reported a net decrease of 154 billion cubic feet (bcf) in gas storage as of January 12, 2024. This withdrawal was smaller than expected and contributed to the price drop. Stocks were significantly higher than last year and above the five-year average.

European Market and Biden’s Policy

European natural gas prices fell last week despite geopolitical tensions, as robust stockpiles and sluggish industrial demand provided stability. The EU, having reduced its Russian gas intake, tripled its imports of U.S. LNG in 2023. However, the Biden administration’s climate-driven reassessment of U.S. gas exports raises concerns about future LNG project approvals, potentially impacting Europe’s energy strategy.

Forecast for the Coming Week: Bearish Outlook

The upcoming week presents a bearish outlook for U.S. natural gas prices. The primary driver behind this sentiment is the anticipated warmer weather pattern, which is expected to significantly reduce heating demand. Historically, natural gas prices are sensitive to changes in weather forecasts, particularly during the winter months when heating demand peaks. The shift to warmer conditions, as predicted by NatGasWeather, suggests a substantial decrease in consumption, thereby exerting downward pressure on prices.

Additionally, the recent data indicating a recovery in gas output, coupled with the smaller-than-expected withdrawal from storage reported by the EIA, contributes to this bearish perspective. An increase in supply, especially during periods of reduced demand, typically leads to lower prices.

Traders should also consider the geopolitical and policy factors at play, particularly the Biden administration’s stance on LNG exports and the European market’s dependency on U.S. LNG. While these factors could introduce some volatility, the dominant weather-related demand dynamics are likely to overshadow them in the short term.

In summary, the combination of rising supply, reduced demand due to warmer weather, and the current policy landscape points towards a continued downward trend in natural gas prices for the coming week.