U.S. natural gas futures fell about 5% on Wednesday on forecasts for the weather to turn warmer than normal in late January after next week’s expected freeze when demand is projected to reach record highs.
The futures market is trading for February. Looking ahead to February, analysts said the country should have enough production and gas in storage to meet at least normal weather conditions without boosting prices by much.
Starting this weekend, however, meteorologists forecast temperatures across most of the Lower 48 states will drop to well below normal levels, especially across the middle of the country from Washington state to around St. Louis, Missouri.
That extreme cold is expected to boost gas demand for heating to record highs and has already started to cause supplies to decline by freezing oil and gas wells, pipes and other equipment in the Rockies (Colorado and Wyoming) and Bakken shale (North Dakota and Montana). The industry term for freezing wells is “freeze-offs.”
Massive freeze-offs cut gas supplies for heating and power generation in February 2021 in Texas and other U.S. Central states and December 2022 in Appalachia, forcing some power grid operators and utilities to impose rotating outages because there was not enough electricity available with so many power plants shut due to a lack of fuel and other problems.
Front-month gas futures for February delivery on the New York Mercantile Exchange fell 15.1 cents, or 4.7%, to settle at $3.039 per million British thermal units (mmBtu). On Tuesday, the contract closed at its highest level since Nov. 15.
It was the first decline in the front-month in seven days and pushed it out of technically overbought territory for the first time in four days.
SUPPLY AND DEMAND
Financial firm LSEG said average gas output in the Lower 48 fell to 107.3 billion cubic feet per day (bcfd) so far in January, down from a monthly record of 108.5 bcfd in December.
On a daily basis, output was on track to drop by 3.1 bcfd over the past few days to a preliminary three-month low of 105.1 bcfd on Wednesday. Analysts, however, have noted that preliminary data is often revised later in the day.
The output losses so far this week were small compared with losses of 19.6 bcfd from Dec. 21-24 during Winter Storm Elliott in 2022 in Appalachia and 20.4 bcfd from Feb. 8-17 during the freeze in 2021 in Texas and other U.S. Central states.
Meteorologists projected U.S. weather in the Lower 48 states would switch from mostly warmer than normal now to colder than normal from Jan. 13-22 before turning back to mostly warmer than normal from Jan. 23-25.
As use of the fuel for heating soars, LSEG forecast U.S. gas demand in the Lower 48, including exports, would jump from 137.0 bcfd this week to 160.8 bcfd next week. The forecast for next week was higher than LSEG’s outlook on Tuesday.
On a daily basis, total U.S. gas demand, including exports, was on track to reach a daily record of 171.4 bcfd on Jan. 15 and 174.5 bcfd on Jan. 16, according to LSEG’s latest forecasts.
Traders noted it would be unusual for gas use to hit a record on Jan. 15 since it is the Martin Luther King Day U.S. holiday when many businesses and government offices will be shut for a long weekend.
Those daily forecasts were higher than LSEG projected on Monday and would top the current all-time high of 162.5 bcfd set on Dec. 23, 2022, during the winter storm the energy industry calls Elliott, according to federal energy data from S&P Global Commodities Insights.