Warm Winter Weather Pressures Natural Gas Prices Lower Amid Supply Surge

Natural gas prices retreated sharply on Thursday, with February Nymex natural gas futures (NGG26) closing at -0.118 per MMBtu, representing a 3.35% decline. The primary culprit behind the retreat in gas prices was an extended outlook calling for above-normal temperatures across much of the continental United States. Forecaster WSI highlighted that broad stretches of the western and central US are expected to experience warmer-than-typical conditions throughout the coming week, a development that threatens to dampen heating demand and pressure gas prices further.

Supply Dynamics Override Bullish Inventory Data

Paradoxically, Thursday’s price decline occurred despite what should have been a supportive catalyst: the weekly EIA inventory report revealed that natural gas inventories fell by 119 bcf for the week ended January 2, exceeding the market consensus draw of 113 bcf. However, this bullish inventory figure failed to provide meaningful support to gas prices, underscoring how supply-side pressures have taken center stage in the market narrative.

The bearish supply backdrop stems from robust US natural gas production. The EIA raised its 2025 production forecast to 107.74 bcf/day during its December 9 update, marginally higher than November’s 107.70 bcf/day projection. Current production levels remain near historical peaks, with the lower-48 states generating 111.0 bcf/day on Thursday—an impressive 8.7% year-over-year gain. This elevated production environment continues to weigh on gas prices, limiting upside potential even when inventory draws suggest tightening supplies.

Demand Challenges Persist Across Segments

On the consumption side, headwinds persist across key demand segments. Lower-48 state gas demand registered 88.0 bcf/day on Thursday, down 29.5% year-over-year according to BNEF data—a significant indicator of weakened heating demand driven partly by the warmer temperatures mentioned earlier. Estimated LNG net flows to US export terminals were 19.2 bcf/day, showing a marginal 1.5% week-over-week decline.

Electricity demand provided a modest bright spot, as the Edison Electric Institute reported US electricity generation rose 6.7% year-over-year in the week ended January 3, reaching 82,732 gigawatt-hours. Over the trailing 52-week period, electricity output climbed 3.0% year-over-year to 4,306,606 GWh. This improvement in power demand could theoretically support gas consumption at natural gas-fired generation facilities, yet demand weakness in other sectors continues to dominate the overall picture.

Storage and Drilling Activity Signal Ample Supply

As of January 2, natural gas inventories stood 3.5% below year-ago levels but remained 1.0% above their 5-year seasonal average, pointing to adequate supply availability that caps price upside. By contrast, European gas storage conditions appear tighter, sitting at just 58% capacity as of January 6—well below the 72% five-year seasonal average for this period.

On the drilling front, the number of active US natural gas rigs contracted by 2 to reach 125 in the week ending January 2, according to Baker Hughes data. While this represents a small setback, the rig count remains within 5 units of the 2.25-year high of 130 rigs established on November 28. The trend over the past year has been decidedly positive for production, with gas rig counts recovering from September 2024’s 4.5-year low of 94 units, highlighting the sustained productivity of the sector.

Outlook for Natural Gas Prices Hinges on Weather Shifts

The confluence of abundant production, elevated storage levels, and near-term weather patterns pointing toward milder conditions suggests gas prices face continued downward pressure in the immediate term. The collapse in year-over-year demand reflects both seasonal softness and structural challenges that have persistently pressured gas prices throughout the current market cycle. Unless weather patterns reverse sharply or demand dynamics shift unexpectedly, the trajectory for natural gas prices appears challenged despite the supportive inventory draws documented in recent EIA reports.