Natural Gas Prices Forecast: Bearish Outlook Amid Record Output, Mild Weather Forecasts

Highlights

• U.S. Natural Gas hits two-week low driven by record production and mild weather.
• Futures test $3 threshold with notable downturn in December delivery futures.
• 14% weekly drop in front-month futures, the largest since the end of May.

Natural Gas Prices Hit 2-Week Low

Last week, U.S. natural gas prices experienced a notable decline, reaching a two-week low, driven by record-high production and unseasonably mild weather conditions. December delivery futures on the New York Mercantile Exchange witnessed a significant downturn, challenging the key psychological threshold of around $3 per mmBtu. Throughout the week, these front-month futures saw a decline of approximately 14%, representing the most substantial weekly fall observed since the end of May.

Supply Dynamics

A key factor in the price movement was the record gas output. LSEG reported an average output in the Lower 48 states reaching a new high of 107.2 billion cubic feet per day (bcfd) in November, surpassing the previous record of 104.2 bcfd in October. On November 10, daily output was projected to hit a record 108.1 bcfd.

Demand Fluctuations

Demand dynamics were influenced by varying weather patterns. The milder weather expected until November 23 is likely to reduce heating demand, allowing utilities to inject gas into storage until late November. However, a shift to colder temperatures is anticipated around the Thanksgiving holiday, which could increase demand.

Despite mild weather, national demand is expected to rise to seasonal levels as colder air sweeps across the northern and central U.S. Later, a return to very light demand is forecasted due to warm high pressure covering most of the U.S., resulting in above-normal temperatures.

Storage and Exports

Storage levels reflected these supply-demand dynamics. Analysts estimated a withdrawal of about 7 billion cubic feet (bcf) of gas for the week ending November 3, the first of the season, followed by an injection of about 45 bcf due to the return of milder weather. U.S. total natural gas in storage is expected to stand at approximately 3,817 bcf as of November 10, above the five-year average. The last government report for the week-ending October 27 showed working gas in storage at 3779 Bcf.

Exports, particularly to Mexico, showed a decline, with average exports in November falling to 5.5 bcfd from 6.5 bcfd in October. However, gas flows to U.S. LNG export plants increased, averaging 14.1 bcfd in November.

Market Sentiment and Futures

The market’s sentiment appears cautiously bearish, with the 2023-2024 winter not expected to be colder than normal. This perception is reflected in the increasing premium of futures for 2025 over 2024, indicating expectations of rising prices due to soaring LNG export demand in the coming years.

A bearish factor throughout the year has been the lower spot prices at the Henry Hub, with the spot market trading below front-month futures for most of the year.

Week Ahead

Looking ahead, while the mild weather will likely continue to suppress heating demand in the short term, the market is also bracing for a possible demand surge around Thanksgiving. Investors and traders will be closely monitoring weather forecasts and storage levels to gauge the market direction. The EIA’s resumption of its weekly gas storage report will also provide crucial data for market participants.

Overall, the natural gas market remains in a bearish mode, driven by the complex interplay of weather-driven demand, robust supply, and fluctuating export dynamics, with traders keenly observing these factors for future price movements.