Multiple Pressures Weigh on Natural Gas Prices as US Forecasts Shift

Natural gas futures took a notable turn downward this week, with February Nymex contracts sliding 4.91% to close at a 2.25-month low. Market analysts point to a confluence of bearish factors that have accumulated pressure on valuations, from supply-side dynamics to weather expectations—dynamics that investors tracking natural gas ETFs should monitor closely.

Weather Forecasts Suppress Heating Demand Expectations

The primary driver behind the recent weakness stems from meteorological predictions. Xweather issued forecasts indicating that above-normal temperatures will persist across nearly the entire United States through January 10, with more typical seasonal conditions returning in the month’s latter half. This temperature pattern is significant because warmer winters reduce heating demand, allowing natural gas inventories to rebuild rather than deplete. Such inventory accumulation typically exerts downward pressure on market valuations.

Production Gains Continue to Challenge Prices

On the supply side, the outlook remains constructive—perhaps too constructive for current prices. The Energy Information Administration revised its 2025 natural gas production forecast upward to 107.74 billion cubic feet per day, compared to its November projection of 107.70 bcf/d. Current production levels are hovering near historical peaks, supported by active drilling activity. Recent data from BNEF shows Lower-48 dry gas production hit 112.2 bcf/day on Tuesday, representing an 8.7% year-over-year increase. Meanwhile, active drilling rig counts recently touched a two-year high, suggesting production resilience.

Demand and Storage Dynamics Present a Mixed Picture

Gas demand tells a different story. Lower-48 state gas demand declined to 89.5 bcf/day, down 25.2% compared to the prior year—a significant contraction that reflects seasonal patterns and reduced consumption needs. LNG export flows, meanwhile, reached 18.5 bcf/day, down 6.0% week-over-week.

From an inventory perspective, the latest EIA report revealed that natural gas stockpiles for the week ended December 26 fell by only 38 billion cubic feet—substantially below consensus expectations of 51 bcf and markedly smaller than the five-year average weekly draw of 120 bcf. Current inventory levels stand 1.7% above their five-year seasonal average, suggesting ample available supplies. European gas storage presents a contrasting picture, sitting at 60% full as of January 4, trailing the historical average of 73% for this period.

Power Generation Offers Limited Support

Electricity generation provided a modest bright spot. The Edison Electric Institute reported that US electricity output during the week ending December 6 climbed 2.3% year-over-year to 85,330 gigawatt hours, with the 52-week cumulative figure up 2.84% to 4.29 million GWh. Stronger power demand could theoretically support gas prices through increased consumption at generation facilities, though current weakness suggests this support remains insufficient against other headwinds.

Drilling Activity Reflects Market Caution

Baker Hughes data showed active US natural gas drilling rigs declined by two to reach 125 in the week ending January 2. While modestly below the 2.25-year high of 130 established on November 28, the rig count has climbed significantly from September 2024’s 4.5-year trough of 94 units. This recovery indicates operational confidence despite recent price pressure.

For investors considering natural gas ETFs, the current environment highlights the complex interplay between supply expansion, seasonal demand reduction, and inventory management—factors likely to continue shaping market direction in coming weeks.