Natural Gas Prices Forecast: How Will Industry Adjust to Market Glut?

U.S. Natural Gas Prices: A 30-Year Low

The U.S. natural gas market is experiencing its lowest inflation-adjusted prices in over three decades. As of February 15, front-month futures at Henry Hub slumped to $1.58 per million British thermal units, the lowest since the contract’s inception in 1990.

Warm Winter and El Niño’s Role

The winter of 2023/24, marked by warmer than average temperatures, significantly impacted gas consumption. The United States saw 11% fewer heating degree days than the long-term average. The strong El Niño conditions this winter played a crucial role, directing warmer air into the northern United States. Historically, strong El Niño episodes have correlated with warmer U.S. winters, reducing heating demand.

Surplus in Gas Inventories

As of February 9, working gas stocks reached 2,535 billion cubic feet (bcf), the highest for the time of year since 2016. This inventory level was 346 bcf above the ten-year average. Despite lower demand, dry gas production in November 2023 increased by 4% year-over-year, contributing to the growing surplus.

Market Reaction and Adjustment

These low prices are a clear indicator for the industry to slow down drilling and production. The number of rigs drilling for gas dropped from 162 in September 2022 to 119 in January 2024. However, the rig count has remained stable in recent months, and well productivity has increased. Additionally, more gas is being produced as a byproduct of oil extraction.

Future Prospects and Price Adjustments

The industry’s response, including reducing capital expenditures and active rigs, aims to correct the imbalance. In the near term, low prices are likely to favor gas-fired power generation over coal, aiding in inventory reduction. Furthermore, gas prices for March delivery are already showing signs of adjustment, slipping below April prices.

Conclusion: Market Stability Ahead?

The current state of the natural gas market, with its historic low prices and surplus inventory, suggests a cautious optimism for a rebalance. The industry’s strategic adjustments and the potential increase in gas-fired power generation are key factors in stabilizing prices and inventories in the upcoming months.

Technical Analysis

Natural gas futures are edging lower on Monday in today’s holiday shortened trade. Although many traders are focused on the price, I believe the concentration should be on the chart pattern.

The chart pattern is going to tell us more about this market’s near-term potential than the price. At this time, we can see that it’s been posting a series of lower-lows, lower-highs and lower-bottoms and lower-tops, which is the classical definition of a down-trend.

Picking a bottom is going to be difficult, but identifying a shift in the chart pattern with an identifiable risk, will be easier. Essentially, we’re waiting for the market to stop posting lower-lows and to start making higher-highs. However, the best signal will be a lower-lower and a higher close, or a closing price reversal bottom.