Warmer Weather Outlook Pressures Natural Gas Prices Lower

Natural gas futures experienced a significant retreat on Friday, with February Nymex natural gas (NGG26) closing down 0.068 points (-1.84%), marking the fifth consecutive day of declines and reaching a 2.25-month low for the nearest contract.

Weather Prediction Drives Supply-Demand Dynamics

The primary catalyst behind the downward pressure stems from improved weather prediction models. Atmospheric G2’s latest forecast indicates substantially above-normal temperatures are expected across the eastern two-thirds of the United States during January 7-11, with warmer conditions continuing through the north-central region during January 12-16. This weather prediction outlook carries immediate implications for heating demand, as fewer heating days translate directly into reduced natural gas consumption.

The temperature forecast also suggests a secondary benefit: warmer weather conditions typically support inventory accumulation. With reduced heating demand supporting storage builds, market participants grew concerned about inventory dynamics shifting from supply-constrained to surplus conditions.

Production Surge Compounds Bearish Pressure

Adding to downside momentum, US natural gas production continues climbing toward record levels. The Energy Information Administration (EIA) recently elevated its 2025 production forecast to 107.74 bcf/day, up marginally from the November estimate of 107.70 bcf/day.

Current production metrics reinforce this constructive supply picture. Lower-48 dry gas production reached 110.0 bcf/day on Friday, representing 4.4% year-over-year growth, while LNG export flows to US terminals averaged 19.6 bcf/day, up 1.9% week-over-week. Active natural gas drilling rigs recently touched a 2-year high, signaling that upstream investment remains robust despite price pressures.

Inventory Data Signals Ample Supply

Recent inventory reports amplified concerns about oversupply. The EIA’s weekly inventory update for the week ended December 26 revealed a storage draw of just 38 bcf—significantly below both the market consensus of 51 bcf and the historical 5-year weekly average draw of 120 bcf. This smaller-than-expected draw indicates supply continues accumulating in storage rather than being consumed.

As of December 26, storage inventories stood 1.1% below year-ago levels but remained 1.7% above their 5-year seasonal average, pointing toward sufficient natural gas supplies in North America. European storage presents a different picture, with facilities at 62% capacity as of December 31, trailing the 5-year average of 74% for this period.

Limited Offset From Electricity Demand

While electricity generation provided some support, the demand picture remained insufficient to absorb the rising supply. The Edison Electric Institute reported that Lower-48 electricity output for the week ended December 6 climbed 2.3% year-over-year to 85,330 GWh, with 52-week output up 2.84% year-over-year at 4,291,665 GWh.

Drilling Activity Moderates Slightly

Baker Hughes data indicated natural gas drilling rigs declined by two to 125 in the week ending January 2, though this level remained modestly below the 2.25-year peak of 130 rigs achieved on November 28. The uptrend in drilling activity throughout 2024—climbing from a 4.5-year low of 94 rigs in September—continues supporting production expansion.

The combination of warmer weather prediction, surging production, and ample storage supplies overwhelmed demand-side strength, pushing natural gas prices to their lowest levels in over two months.