Natural Gas Futures Plummet: U.S. natural gas futures experienced a significant 7% decline to reach a one-week low, driven by record output and persistent forecasts of mild weather extending through late November. These weather conditions are keeping heating demand at bay, allowing utilities to continue injecting gas into storage for several more weeks.
Analysts at energy consulting firm Gelber and Associates noted that near-term weather forecasts have been revised to predict notably warmer conditions. This is in contrast to El Nino suggesting warmer winter temperatures on a longer horizon.
Additionally, the absence of a storage report from the U.S. Energy Information Administration (EIA) this week, due to a planned systems upgrade, has added to market volatility. The EIA will resume its regular schedule on November 13.
Due to the lack of available storage data this week, market participants are closely monitoring weather forecasts to gain insight into how the withdrawal season will unfold.
Front-month gas futures for December delivery on the New York Mercantile Exchange fell 25.1 cents, or 7.1%, settling at $3.264 per million British thermal units (mmBtu). This marks their lowest closing price since October 27 and represents the most significant one-day percentage decline since May 22.
One bearish factor impacting the futures market has been lower spot or next-day prices at the Henry Hub benchmark in Louisiana. For most of the year, the spot market has traded below front-month futures for 176 out of 212 trading days, based on data from financial firm LSEG. Next-day prices at the Henry Hub fell about 4% to $3.00 per mmBtu for Monday.
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Analysts have suggested that as long as the futures market remains in contango, with the second-month higher than the front-month, and spot prices remain below the front-month by a sufficient margin to cover margin and storage costs, traders should be able to capitalize on arbitrage profits by purchasing spot gas, storing it, and selling a futures contract.
The premium of January futures over December reached around 30 cents per mmBtu, rising to a record high for the third consecutive day. This premium may incentivize some speculators to store gas for an extended period, hoping for higher prices later in the winter. However, utilities are expected to begin withdrawing gas from storage in mid to late November as daily heating demand for the fuel surpasses production.
Supply and demand dynamics indicate that the average gas output in the Lower 48 U.S. states increased to 107.3 billion cubic feet per day in November from a record 104.2 bcfd in October. Daily output reached an all-time high of 108.0 bcfd, surpassing the prior daily record of 107.7 bcfd.
Meteorologists anticipate the weather transitioning from warmer than normal conditions from November 6 to 11 to near-normal temperatures from November 11 to 14. Subsequently, it is expected to return to warmer than normal conditions from November 15 to 21.
With seasonally colder weather approaching, forecasts suggest that U.S. gas demand in the Lower 48 states, including exports, will increase from 101.5 bcfd this week to 109.2 bcfd next week. These projections exceed LSEG’s outlook from the previous week.
Furthermore, gas flows to the seven major U.S. liquefied natural gas (LNG) export plants have risen to an average of 14.3 bcfd in November, up from 13.7 bcfd in October and reaching a record 14.0 bcfd in April. These factors contribute to the evolving landscape of the natural gas market.