The Winter ’24/’25 (Nov-Mar) natural gas strip is only 30 cents above where Winter ’23/’24 settled. Does this make sense? Just over two weeks ago, Winter ’24/’25 was trading at $3.34, but now at $2.80, it seems like the peak-winter risk premium has evaporated, and the market is pricing in another anomalously warm winter.
The chart above shows that prices gradually eroded last year, settling for November 2023 at $3.64, but slipping all the way to $1.65 in March. Last winter averaged $2.52. This winter’s average forward price has already shrunk to $2.80 (as of October 21). Could the trend continue toward even lower prices?
We’ve held a bearish view on the Winter ’24-’25 strip for some time, but now we’re questioning how much room is left for prices to drop further. Of course, weather is the dominant factor, and if we see another mild winter, prices will likely suffer.
One way to assess this winter’s pricing is by comparing it to last year. Winter ’23/’24 settled at $2.52/MMBtu, and while there are similarities, key differences exist:
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Winter '24/'25 – This Winter: |
Winter '23/'24 – Last Winter: |
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In summary, the supply-demand balance and risk factors are favorable compared to last year’s. Therefore, it’s puzzling that this winter’s prices are only 30 cents higher than last year’s. One prevailing belief is that production will rebound quickly if prices rise, loosening the supply-demand balance. This has been our base case and a key reason for our cautious outlook on prices. However, stagnant supply (i.e., no production response to a price recovery) has been the only bullish supply factor we’ve identified, excluding weather.
The market seems to be pricing in a warm winter. With October projected to be the second hottest in the last 20 years and November likely to be the sixth warmest, there could be upward pressure on prices if weather models start to shift. As it stands, the gas market appears to be pricing in a bearish outlook similar to last year’s outcome.
Bottom line: We believe there’s an equal chance that winter gas realizes above its current mark of $2.80; we are neutral for winter natural gas prices. While we see limited downside from current prices, the upside potential still exists if weather patterns change. As always, if the warm weather continues, prices could fall further..