Natural Gas Futures Reverse Momentum Amid Bearish Demand; Slippage of spot prices

With strong production and weakening demand, natural gas futures have once again fallen victim to price bears.

At the first sight:

  • NGI models 65 Bcf draw
  • Fair weather on the cards
  • Production at 104 Bcf/d

After a gain of 2.8 cents on Friday – but eight straight losses before that – Nymex March gas futures settled at $1.576/MMBtu on Tuesday, up 3.3 cents day/day.

NGI Spot Gas National Avg. shed 1.0 cent to $1,585. This happened after several declines in the previous week.

Production was around 104 Bcf/d on Tuesday, down slightly from the previous week but up nearly 5 Bcf/d from a year earlier, according to Wood Mackenzie. Production reached record levels above 106 Bcf/d last year and remains strong through early 2024.

Notably, futures climbed about a dime after Tuesday’s trading after Chesapeake Energy Corp. said it plans to cut production this year.

At the same time, Wood Mackenzie estimated Lower 48 demand at 101.5 Bcf/d on Tuesday, down more than 4 Bcf/d from the previous week’s average and down more than 3 Bcf/d from the comparable period in 2023. Wood Mackenzie estimates export demand on Tuesday was just under 13 Bcf/d, down about 1 Bcf/d from recent highs.

Weak weather-driven demand remained the main culprit behind price weakness. After a chilly three-day Presidents Day holiday weekend, the updated forecast “data maintained a return to low national demand Tuesday through Thursday as a warm ridge expands to dominate much of the interior U.S. with comfortable highs.”

Further, the company will see a burst of cooler air this coming weekend, but this is expected to be followed by favorable conditions in the last week of February and the first week of March.

“The big question going forward is whether much cheaper natural gas prices will lead to lower U.S. production in the spring,” NatGasWeather said.

Absent such a change, an imbalance between supply and demand could dictate the coming peak season with inventories well in excess of the five-year average, according to data from the US Energy Information Administration (EIA).

“Lots of bearish elements remain, highlighted by the massive bearish shortfall in last week’s EIA storage report, very strong US production, warmer trends at the end of February…and underperforming LNG exports,” NatGasWeather said.

“The net result of recent and upcoming weather patterns is an increase in surpluses toward plus-500 Bcf, starting with this week’s EIA report, where the picture painted is likely to be nearly 100 Bcf lighter than normal again. Stocks at the end of the pumping season are expected to be close to 2,100 Bcf unless cooler trends emerge in the first half of March,” the firm added. “Until the weather shows an extended period of stronger than normal demand, it is possible that natural gas prices will continue to decline to test $1.50.”

EIA last printed a warehouse selection 49 Bcf for the week ending in February. 9. It missed expectations for a draw in the high 60s Bcf and was well below the five-year draw average of 149 Bcf.

The decline over the last period of the EIA report brought inventories down to 2,535 Bcf, but inventories were 16% above the five-year average. This marked an increase from the 13% surplus at the start of 2024.

Eastern region stocks were 9% above their five-year average over the past week, while all other regions posted double-digit gains. Mountain stocks were 51% above the five-year average, the largest surplus by region.

Houlihan Lokey’s JP Hanson, global head of oil and gas, noted that the more than 40% decline in natural gas futures in 2023 has extended into this year “primarily due to strong domestic production and the El Niño effect” on weather. El Niño patterns tend to lead to mild winters in the north and moderate heating demand overall.

The LNG boom

Check out the EIA’s storage report covering the week ending in February. 16, NGI modeled a 65 Bcf draw, consistent with a preliminary survey from The Desk that showed estimates converging around a tie in the 60s Bcf. The five-year average drawdown is 168 Bcf.

While less supply would help prices in the near term, Hanson said cutting production to address the short-term imbalance is hardly a sure thing. Producers rose to record levels in large part due to an expected increase in demand for liquefied natural gas in 2025 and beyond. While some producers may slow down slightly during peak season, others are hesitant to hit the brakes as they want to maintain momentum to face the looming LNG surge.

“Continued global demand and huge natural gas reserves in the US have motivated LNG producers to expand capacity over the long term,” Hanson said.

RBN Energy LLC analyst Housley Carr noted that ground zero for the upcoming LNG shift is the stretch along the Gulf Coast in Texas and Louisiana.

“To the existing 12.5 Bcf/d of LNG export capacity in both states, an additional 11+ Bcf/d of additional capacity is planned by 2028,” noted Carr. “The magnitude of the changes coming is huge. There will be plenty of new LNG export terminals — even if the month-long hiatus on new gas export licenses announced by the Biden administration on January 26 drags on.”

This is good for demand and prices in the long run. This is likely to lead to even greater output needs in the coming years. “We’re going to see rising gas production in both areas” in the Permian Basin and the Haynesville Shale, Carr said. “And there will be more pipeline projects than you can shake a stick at.”

Cash prices

Spot gas prices varied by region but were mostly in the red on Tuesday amid mild weather.

Chicago Citygate lost 9.5 cents to average $1,365 since Friday, while Florida Gas Zone 3 fell 5.0 cents to $1.645 a OGT on the Midcontinent fell 14.0 cents to $1,250.

NatGasWeather said the lower 48 overall will see “light to very light national demand” this week and into early March.

“A warm break will occur over most of the US over the next few days, with highs in the 40s-50s across the northern US and 50s-80s over the central and southern US,” the firm said Tuesday. “A cold weather system will track the Midwest and Northeast this weekend with lows in the 10s to 20s for a minor increase in national demand.”

But further north could enjoy mild highs in the 30s to 50s next week and into early March, the forecaster added, while the south “will be nice” with highs in the 60s to 80s.

As for pipelines, Wood Mackenzie analyst Kevin Ong noted on Tuesday that after other recent brief outages, El Paso Natural Gas Pipeline declared force majeure on its 2000 line and restricted flows until further notice. The Line 2000 segment near Coolidge, AZ delivers Permian flows west to desert markets.

Prices in the Southwest jumped in response on Tuesday El Paso S. Mainline/N. Baja up 64.0 cents to $2,150. But when Permian flows are slowed by maintenance, it creates a glut of gas in West Texas and often depresses prices there. On Tuesday, Wow in West Texas, it fell 31.5 cents to 40.5 cents.

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