On February 8th, the mood in the NYMEX gas futures market turned notably negative as traders drove prices for the prompt-month contract to their lowest point in 40 months. This downward trend was fueled by several factors, including mild weather, robust production, and a growing surplus in inventory. In the morning session, the Henry Hub March gas contract dropped an additional 5 cents from the previous day's settlement, reaching just $1.91/MMBtu – marking its lowest level since September 2020. Despite this, the market maintained a narrow contango to April, with April holding a 2-cent premium to the prompt. Futures prices for May and beyond remained above $2, according to data from Intercontinental Exchange and S&P Global Commodity Insights.
Recent trading sessions have seen NYMEX prompt gas prices hitting new daily lows, dipping below $2 as traders focus on the increasing supply length in the market. This bearish sentiment persists even in light of the anticipated return of wintry weather in late February, as forecasted by meteorologists.
Fundamentals
Since late January, mild weather across the US Lower 48 states has led to a significant decrease in gas demand, particularly from the residential-commercial and power sectors. Month-to-date, the US population-weighted temperature has averaged a mild 46 Fahrenheit, about 5 degrees above normal. Consequently, US gas demand in February has fallen below normal levels. Including LNG feedgas and exports to Mexico, total US demand this month has averaged just under 112 Bcf/d – nearly 9 Bcf/d, or about 7%, below the five-year average and significantly lower than the 160 Bcf/d highs seen in mid-January, as per data from S&P Global Commodity Insights.
Strong domestic gas production in February has exacerbated the recent supply pressure from mild weather. Gas production has rebounded to an average of 104.4 Bcf/d, showing a surprisingly swift recovery from the mid-January freeze-off that briefly reduced output to just 88 Bcf/d. Month-to-date, US production is down by just over 1% from its December 2023 record high.
Mild weather and robust gas production have set the US gas market on track for another substantial inventory surplus by later this month. On February 8th, the US Energy Information Administration reported another below-average withdrawal from US inventory of just 75 Bcf in the prior week. This latest withdrawal boosts the US inventory surplus to 248 Bcf, or almost 11%, above the five-year average, compared with a prior-week surplus of just 130 Bcf, or about 5% above average, according to EIA data.
With market analysts projecting relatively modest drawdowns from inventory over the next two reporting weeks, many anticipate a new annual high for the US gas storage surplus. According to a forecast from S&P Global Commodity Insights, the inventory surplus could exceed 430 Bcf by mid-month, representing more than a 20% surplus to the five-year average.
Weather Outlook
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natural gas price forecastWhile relatively bearish short-term supply-demand fundamentals have dominated the US gas market narrative lately, 14- to 21-day weather forecasts are now predicting much colder temperatures across the US Lower 48 states from mid- to late February. The US National Weather Service anticipates below-average temperatures from February 14th to March 1st in the East Coast, the Deep South, Gulf Coast states, and some areas of the Midwest.
Assuming colder weather materializes, the futures market selloff to sub-$2 price levels could appear overdone by later this month as heating demand rebounds and storage withdrawals pick up.