Warmer US Weather Forecast Weighs on Natural Gas Valuations Amid Rising Production

Natural gas futures extended losses into a fresh 2.25-month low on Tuesday, with February Nymex contracts closing down -0.173 (-4.91%). The weakness reflects a confluence of bearish factors, chief among them forecasts for above-normal temperatures across the continental US through early January, which will substantially curb heating demand and allow inventory rebuilding.

According to Xweather’s Tuesday forecast, above-normal temperatures are expected to dominate nearly the entire country through January 10, with more typical seasonal conditions anticipated in the latter half of the month. This weather pattern is critical—warmer conditions directly reduce the heating fuel consumption that typically supports natural gas demand during winter months, leaving the market vulnerable to inventory accumulation.

Supply-Side Pressures Intensify

On the supply front, headwinds continue to mount. The EIA raised its 2025 US natural gas production forecast on December 9 to 107.74 bcf/day from November’s 107.70 bcf/day estimate. Current production levels remain near historic highs, with active drilling rigs recently hitting a 2-year peak. Baker Hughes data from early January showed 125 active natural gas rigs—down 2 from the prior week but still elevated compared to the 94-rig low recorded in September 2024.

Real-time production data underscore this supply strength. Lower-48 dry gas output on Tuesday reached 112.2 bcf/day, representing an 8.7% year-over-year increase per BNEF data. This elevated output, combined with moderating demand, is creating a structural price headwind.

Demand Collapse and Inventory Dynamics

Demand metrics paint an equally stark picture. Lower-48 state gas consumption on Tuesday totaled 89.5 bcf/day, reflecting a sharp 25.2% year-over-year decline. LNG export flows to US terminals measured 18.5 bcf/day on the same date, down 6.0% week-over-week, signaling weaker international demand.

The EIA’s December 26 inventory report reinforced bearish sentiment. Storage levels fell by just 38 bcf that week—significantly smaller than the consensus expectation of 51 bcf and dramatically lighter than the 5-year average draw of 120 bcf. As of December 26, total inventories stood 1.1% below year-ago levels but held 1.7% above their 5-year seasonal average, indicating ample supply buffers. This comfortable inventory position removes any supply-tightness premium from the market.

Limited Demand Offsets

One modest supportive factor emerged from electricity generation data. The Edison Electric Institute reported on December 10 that US electricity output in the week ended December 6 rose 2.3% year-over-year to 85,330 GWh, with the 52-week average climbing 2.84% to 4,291,665 GWh. Higher power generation could theoretically support gas-fired generation demand, but this tailwind has proven insufficient to counter the combined weight of warm weather forecasts, rising production, and collapsing heating-related demand.

International Context

European market dynamics add perspective to US valuations. As of January 4, European gas storage sits at 60% capacity, notably below the 73% seasonal average for this period, suggesting tighter conditions abroad—a potential drag on transatlantic LNG arbitrage and US export economics.

The convergence of these factors—abundant domestic production, warm weather reducing consumption, comfortable inventories, and weak demand—has created a challenging environment for natural gas price support in the near term.