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Natural Gas Closer to Record Lows

Stavros Tousios | Wednesday 07 February 2024

Natural gas (NG) futures settled just above the $2/MMBtu key support on Tuesday, February 6, getting closer to record lows of $1.44/MMBtu. The March 2024 natural gas futures contract slid 3.5% to settle at $2.009 per million British thermal units due to slower near-term demand forecasts from warmer weather. 

Although the commodity had rallied in January to around $3.40/MMBtu due to colder weather impacting production at the Permian Basin and Haynesville, it has since receded as peak winter demand has slowly concluded. In fact, NG has been down around 40% in the past three months, close to breaking below the psychological barrier for the first time since April 2023. 

An image of natural gas drills

Factors Driving the Fall

Expectations of warmer weather moved natural gas prices down, primarily driven by seasonality, which reduces demand for heating. 

Interestingly, the warmer weather forecast into February is expected to boost gas production back to record levels. The warmer forecast contrasted with a mid-January forecast that pointed to a potential boost amid colder temperatures. 

Although there had been fears of fuel shortages in the US, it now has to handle storage space limitations due to the growing surplus of natural gas.

Moreover, according to the last Energy Information Administration (EIA) report released on January 31, US natural gas consumption fell 21%, sliding the most in residential and commercial sectors. In the meantime, supply increased by 1.1% due to dry gas production rising by 3.2%.

To add more context, the EIA said it expects storage facilities for natural gas to end the peak season at 1,910 billion cubic feet, a 15% surplus compared to the five-year average. This suggests fewer withdrawals from facilities in upcoming EIA reporting, too. For the week ending January 26, EIA said natural gas stored totaled 2,659 billion cubic feet, 5% above the five-year average and 2% more than last year. 

While the warmer weather has reduced demand for heating, there are structural issues some analysts expected to weigh on prices. For example, despite natural gas producers having reduced rig count by 20% over the past year, oil-well production of natural gas has continued to rise. This takes the natural gas share market up to around 15%, compared to just 6% in 2010. (Source: Barron's)

Potential for Reversal

The near-term weather outlook may point to mild temperatures and low demand, but colder conditions are forecasted from mid-February onwards, which could boost short-term demand. 

Moreover, as the latest EIA report indicated, natural gas deliveries to liquefied natural gas (LNG) export terminals rose 6.6% for the week ending January 26. Actually, a staggering twenty-eight vessels departed US ports. On that end, just on Tuesday, the Biden administration decided to pause new approvals of non-free trade LNG  exports. However, it is not expected to affect approved projects, like in the EU.

Monthly data out of Europe, the largest importer of US LNG, showed that it received 5.43MT in December, just 61% of the total exports. In November, London Stock Exchange Group (LSEG-L) data showed that total exports to Europe had reached a larger portion of 68%. Meanwhile, Europe’s storage capacity has reached 97%.

Some analysts believe there is little upside potential this winter, given record production levels and below-average heating needs. Although factors like record-low prices, short positioning, and geopolitical risks could support a rally, they believe the trend is unlikely to change.

Looking into the Future

A number of economists think natural gas prices will need to stay down to discourage overproduction and stimulate demand from industrial users and exporters. Otherwise, storage facilities could become overloaded before the next season.

But there are other positive signs for natural gas producers. Exports of liquefied natural gas (LNG) are expected to rise sharply over the next few years, which could boost demand and prices. Notably, shares of natural gas companies have not experienced a similar price drop, with the decline in the energy commodity suggesting some optimism about a rebound in the near future.

Looking ahead, weather will continue to be a key driver of natural gas prices, and another major cold spell could push prices higher again. However, many analysts believe prices will remain relatively stable over the near term.

Wrap Up

With the peak winter demand season-ending, natural gas prices are taking a beating ahead of storage injections in spring. Although warmer weather led to decreased consumer demand and prices, exports of LNG have increased, suggesting some optimism about a rebound in the future. However, while natural gas storage remains above the five-year average and the EIA is more pessimistic than optimistic, analysts see fundamentals and trends pointing to near-term risks.

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