Natural Gas Prices Forecast: Futures Plunge with Warmer Outlook, Rising Production

Key Points

• Futures fall 9.5% from Friday’s close as weather forecasts turn warmer. 
• • High storage and production levels amplify bearish demand outlook.
  • Bearish short-term outlook for U.S. natural gas.

  U.S. Natural Gas Futures Drop Sharply

U.S. natural gas futures have opened the week with a significant downturn, plunging nearly 9.5% since last Friday’s close. This decline stands in stark contrast to the recent surge in spot power and gas prices, which have been driven upward by a wave of extremely cold weather.

This weather shift has led to supply disruptions and an unprecedented spike in demand. The bearish trend in futures markets is influenced by forecasts suggesting a change to warmer weather and an uptick in production output, setting a divergent tone from the immediate reactions in the spot markets.

Market Trends

Despite the current cold snap triggering record highs in spot market prices, futures for February are trending lower. We attribute this to the ample gas in storage and robust production capabilities, sufficient to meet even normal weather conditions without significant price hikes.

As of January 5, 2024, working gas storage stood at 3,336 Bcf, well above the five-year average, according to the Energy Information Administration. In the spot market, however, prices have skyrocketed, with hubs like Mid-Columbia and Eastern Gas South experiencing their highest rates in over a decade.

Supply and Demand Outlook

Production in the Lower 48 states dipped in January, but only marginally compared to previous winter storms. With weather forecasts predicting a shift from colder to warmer conditions, demand is expected to decrease from 155.3 bcfd this week to 138.8 bcfd next week.

Nevertheless, U.S. gas supply faced significant drops recently due to extreme weather, causing operational challenges in major fields like Permian Basin and North Dakota’s Bakken shale.

International Perspectives

In the broader LNG market, disruptions in the Red Sea are raising concerns, but have yet to significantly impact LNG prices. QatarEnergy’s recent decision to avoid the Red Sea route for LNG tankers adds costs and extends travel times, but the impact on Europe’s supply remains minimal.

Meanwhile, U.S. LNG exports have surged, positioning the country as a potential compensator for any European shortfalls.

Short-Term Forecast

Considering the current supply levels, warming forecasts, and the resilience of the LNG market, the outlook for U.S. natural gas is bearish in the short term. The anticipated decrease in demand, coupled with adequate storage, suggests that prices may not experience significant upward pressure. However, the situation remains fluid, and traders should monitor weather patterns and storage reports closely.

In summary, while the spot market reacts to immediate weather disruptions, the futures market is steadier, reflecting broader supply and demand dynamics. The short-term bearish outlook is based on a well-supplied market and milder weather forecasts, but external factors like international LNG flows and further weather developments could influence future trends.

Technical Analysis

The natural gas market, with a current price of 3.011, is trading below the 200-day moving average of 3.078 but above the 50-day moving average of 2.774. This positioning suggests a mixed sentiment.

The market is currently straddling the daily pivot at 3.056. If it holds above this pivot, there could be an upside potential towards the main resistance at 3.315.  Conversely, falling below could lead to a test of the main support at 2.874.

The bearish implication of trading below the 200-day average is somewhat moderated by staying above the 50-day average, reflecting a cautiously bearish sentiment in the short term. However, traders should note that although the market is above the 50-day average, the average is trending lower.