Why natural-gas prices are falling despite the largest supply drop in 3 years

The latest weekly decline for domestic natural-gas inventories was the largest since the “Great Texas Freeze” of February 2021, when inventories declined by 338 billion cubic feet (bcf), according to data from the Energy Information Administration.

Natural-gas inventories in domestic storage fell by 326 billion cubic feet for the week ended Jan. 19, to bring working gas inventories to 2.856 trillion cubic feet, the EIA reported Thursday.

“The absence of a more shocking headline draw in nat-gas storage, given worries of a possible record draw leading into the report, has resulted in nat-gas futures giving back their big gains from earlier in the day,” Tyler Richey, co-editor at Sevens Report Research, told MarketWatch.

Supply and demand

The weekly decline matched the average forecast by analysts surveyed by S&P Global Commodity Insights, and was more than double the average withdrawal of 148 bcf for the third week of January over the last five years. The research provider noted that a year ago at this time, the EIA reported a supply decline of 86 bcf.

Despite the “enormous” weekly drop reported by the the EIA, following a week of far-below average temperatures in the U.S., gas in storage is still 142 bcf above the five-year average and 110 bcf above year-ago levels, said Troy Vincent, senior market analyst at DTN.

U.S. dry natural-gas production had fallen to 88 bcf per day on Jan. 16, down from a 30-day average of 105 bcf per day, prior to production “freeze-offs” seen in the Permian Basin, the Midcontinent, and the Haynesville, according to data cited by the S&P Global Commodity Insights survey. The Haynesville is a dry natural-gas formation in Northwest Louisiana and East Texas.

U.S. consumption of natural gas, meanwhile, rose to 123.4 bcf for the week of Jan. 11-17, up from 102 bcf a week earlier and 95.4 bcf a year ago, according to EIA data.

Prices

Overall, prices have been volatile so far this winter, with big moves in either direction driven by weather forecasts.

“Natural-gas prices are typically more volatile in the winter amid weather-related disruptions,” said Vincent.

However, “with record-strong production, season-to-date heating-degree days 3% below year-ago levels and 5% below the five-year average, and the temperature forecast skewing above average across the vast majority of the U.S. from now through the first week of February, there is likely little upside left” in natural-gas prices this winter, he noted.

U.S. dry natural-gas production in the lower 48 states reached an all-time monthly high of 105.5 bcf in December 2023, the EIA said, citing data from S&P Global Commodity Insights.

Still, looking ahead, prices will definitely be “driven on weather if we have another massive cold spell,” said Tariq Zahir, managing member at Tyche Capital Advisors.

If the U.S. experiences another dip in the jet stream bringing colder air down from Canada, that may lift the “roller-coaster ride” for natural-gas prices back up, Zahir said.

S&P Global Commodity Insights said its natural-gas supply-demand model projects “another hulking withdrawal” from U.S. gas storage of 228 bcf for the week ending Jan. 25.

If that prediction is accurate, the drawdown would outpace the five-year average by 43 bcf, or about 23%, and register “more than 60% larger” than year-ago withdrawal estimate of just 141 bcf, the research provider noted, citing EIA data.