Natural gas for February finished down 27c to $3.38/MMbtu on Friday as the prospect of intense cold weather faded to a more moderate cold in the next few weeks. Despite the slight warmer shift in the forecast, January is expected to drop around 850 Bcf. The estimated weather-aided decline pushes our end-of-season (EOS) estimate down to 1.8 Tcf by April. By late January, gas storage should be under the five-year average for the first time in two years.
The natural gas forward curve has shifted in response to the change in expected inventories. Cal 2025 has improved from a 2024 low of $3.00 in early November to $3.41 as of Friday, January 3. Our estimated winter EOS back in November was about 2.1 Tcf and is now 1.8 Tcf, as mentioned above. In other words, the market is likely to be much less oversupplied as we enter the gas injection season in the spring. The curve improvement wasn’t only for Cal 2025. The 2026 calendar strip is up over 25c to $3.849 since early November. It makes sense that there would be sympathy across parts of the curve as the path to 2026 possibly becomes more bullish as the glut of inventories is worked off. The gas market is very sensitive to where gas stocks sit relative to the five-year average, and even removing a few hundred Bcf can make a material difference in how things unfold. We are in early January, so there is plenty of time left this winter for the weather to be warmer or cooler. So far, below-average temperatures are projected to clean up the surplus to the five-year average in inventories.
We remain bullish in the second half of 2025 and Cal 2026. With the move up in the curve, clients have taken advantage of this bullish lean and the call skew by utilizing more costless collars than usual. While the swap will provide you with a much higher floor, collars for next winter and 2026 are our go-to.
Natural Gas Factors
Price Trend. (Bullish, Priced In) Gas prices have rebounded sharply over the past few weeks, with prices briefly reaching $4/MMbtu. Cooler weather forecasts, a tightening S&D balance, and shrinking inventory surplus has supported prices.
S&D Balance. (Mostly Bullish, Priced In)
Long Range Weather Forecast. (Bearish, Surprise) Current long-term weather forecasts show temperatures are expected to be above average this winter. Although, it is important to note that the accuracy of long-range forecasts can be low.
Super-warm La Niña Novembers have led to mixed December outcomes, ranging from colder-than-normal to notably warmer. The warmest November (2001) was followed by a warm December, while the second warmest (2016) led to a colder December. Historical data groups these into three December outcomes: colder than CWG (2016), near CWG (2020, 1999), and warmer than CWG (2011, 2001), often influenced by a positive Eastern Pacific Oscillation (+EPO). Current conditions show a weak La Niña, similar to 2020 but with notable differences in ocean temperatures. The CWG outlook remains warmer than the 30-year average but cooler than the 10-year average. The NOAA model suggests a pattern resembling 2016, implying a possible cold December and warm Q1 2025, while a warmer December could mean more cold volatility in early 2025.
1-15 Day Weather. (Mostly Bearish, Priced In) Two-week forecasts show temperatures significantly above normal for the first week before cooling towards the latter half of the forecast period. Forecasts have trended colder recently, with most of the colder temperatures being in the eastern half of the US, which should be supportive of gas demand.
Storage Level. (Bearish, Priced In) The storage level is a bearish priced-in factor due to the high levels of gas in inventories relative to the five-year average. According to the latest EIA weekly natural gas inventory report, the surplus to the five-year average stands at 132 Bcf above the five-year average and 20 Bcf above last year.
Dry Gas Production. (Bearish, Surprise) These are the most critical drivers of gas prices outside of weather. A material increase in either would pressure prices lower and loosen the supply-demand balance. These are also longer-lasting factors that can weigh on prices for years. Since the start of 2024, gas production has fallen sharply, driven by substantial curtailments and seasonal declines in Appalachia. Given low gas prices, producers may continue to curtail gas production until economics improve. A material drop in production could improve storage balances, but if prices begin to improve, there is a large amount of supply that can be brought back to market, which would be a bearish risk. With some evidence that production is now returning to the market, the dry gas curtailment bubble has been shifted to the bearish quadrant. A large amount of production was likely taken offline this year, which is now waiting to come back. Some operators may also have been drilling and completing wells during this time, which are ready to flow gas if economics have improved enough.
Associated Gas Production.(Bearish, Priced In)With oil prices remaining high and additional egress capacity coming to the Permian in the form of the Matterhorn pipeline, associated gas production may continue to grow in 2024. The Matterhorn pipe will send an additional 2.5 Bcf/d to the Gulf Coast, posing a bearish risk to Henry Hub and regional basis prices such as Houston Ship Channel.
LNG. (Bullish, Priced In) LNG feedgas volumes have pushed to a new high near 15 Bcf/d, with most facilities operating near capacity, and Plaquemines LNG is now receiving about 400 MMCf/d as it enters the commissioning stage. LNG should remain strong through winter before volumes begin to be reduced as temperatures warm up along the Gulf Coast.
ExxonMobil has postponed the start of operations for its Golden Pass LNG Train 1 from the first half of 2025 to late 2025 or early 2026, with the facility likely to be mechanically complete by the end of 2024. Initial gas flows are expected around late December 2025, and Train 1 is projected to have a capacity of 0.68 Bcf/d. Meanwhile, Plaquemines stage 1 is set to have a prolonged start period of about 24 months. It is still expected to come online in 4Q 2024.
Renewables. (Mostly Bearish, Partly Priced In) Renewables remain a perennial threat to gas prices and gas's share of the power stack. Renewable capacity additions in 2023 are expected to set a new record and are now the second-most prevalent source of electricity generation. Still, renewables have proven unreliable at times, which has exacerbated the global energy squeeze as gas usually serves as a flex-fuel when other sources underperform. We think this is priced in, but the effect at the summer peaks on gas generation has some bearish potential.
LNG Outages. (Bearish, Surprise) Feed-gas levels are at their near max capacity, and if there's any unplanned maintenance event or an outage, it might act as a surprise bearish factor for natural gas prices.
Slow Supply Response. (Bullish, Surprise) If production remains near where it is currently and does not grow into winter, this would be a bullish factor for gas prices. Typically, the Northeast region sees higher production receipts in the higher-demand months of the year. Still, due to lower activity levels over the past year, production growth may be more muted.
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