Nat Gas Bulls Need Extreme US Cold to Extend into February

Natural gas futures finished lower on Friday, but held on to its weekly gains. The price action reflected the combination of strong cash markets, solid export demand and a longer-term outlook for warmer temperatures.

On Friday, March natural gas futures settled at $4.081, up $0.076 or +1.90%.

Over the short-run, traders are eyeing the potential for further freeze-offs that could keep output low, however, the new forecasts suggest the current cold front could break up by February. Meanwhile, European demand for U.S. exports is expected to remain high.

Frigid Temperatures Capping Production

Natural Gas Intelligence NGI reported U.S. production remained light early this year relative to late 2021 highs because of freeze-offs in key gas-producing basins. Bloomberg estimated production at 94.5 Bcf on Friday, off about 2.5 Bcf from last year’s peak.

EBW Analytics Group senior analyst Eli Rubin said further production interruptions look with frigid temperatures on the way.

“The possibility of late-month freeze-offs remains a crucial wild card,” he said. “The cooling in the January weather forecast over the past three weeks, particularly for the last third of the month, has led to the coldest outlook since the 2014 Polar Vortex.”

European Energy Crisis Depends

According to reports, limited Russian flows of gas to Europe this winter amid political turmoil deepened an energy crisis on the continent and bolstered demand for American shipments of the super-chilled fuel.

NGI estimates showed the U.S. LNG feed gas volumes topped 13 Bcf on Friday – on par with record levels.

Assuming normal weather this winter, Wood Mackenzie Vice President Massimo Di Odoardo said at current levels of Russian exports, European storage inventories would drop to a record low by the end of March, even with U.S. LNG in the mix there. An exceptionally cold winter in Europe could push inventories “close to zero” by the spring, he said.

Short-Term Outlook

Prices are likely to remain underpinned over the short-run. The harsh weather conditions combined with strong LNG demand and modest production point to the potential for a month’s worth of 200-plus Bcf withdrawals of gas from storage. However, we’re going to need to see lingering cold into February to drive enough short-sellers out of the market and bring in enough new speculative buyers to spike prices higher.