The cold weather that blanketed much of the country in late November and December made a "sizeable dent" in natural gas inventories and lifted prices, and if forecasters are correct that below-normal temperatures will persist through mid-January, there's more upside for gas prices ahead, Barclays Capital analysts said Thursday.

Weather forecasters have dubbed the storm now smothering the Northeast as Hercules.

"Weekly storage reports suggest that storage levels finished the year with less than 3,000 Bcf in the ground, a more than 500 Bcf deficit to last year's level, and more than 285 Bcf below the five-year average at the end of December," Biliana Pehlivanova and Shiyang Wang said in a note. "This has pushed prices above $4.25/MMBtu," with the latest forecasts suggesting low temperatures to last for the next two weeks.

On a weather-adjusted basis, the gas supply/demand balances for this year appear similar to 2013, they said. Industrial demand remains strong, but a big jump in gas production still would create coal-to-gas displacement to balance the market.

"But with three winter months still ahead of us, weather anomalies remain a key risk that could alter the trajectory of balances and prices significantly," the analysts wrote. Cumulative first quarter withdrawals over the past five years have averaged between 990 Bcf to 1,690 Bcf, according to data.

As it is now that domestic gas output is abundant, weather is the determining factor in setting the price for natural gas.

"In fact, if the weather turns sharply warmer and withdrawals follow the five-year minimum path in January-March, the winter could end with 2,000 Bcf in the ground," wrote the Barclays analysts. "However, with forecasts for the first half of January calling for 16% colder-than-normal temperatures, the first month of the year is unlikely to see five-year minimum draws."

If January were to be 8% colder than normal, as it was in December 2013, followed by five-year average minimum draws in February and March, the winter could end with 1,800 Bcf in storage, in line with Barclays' original forecast.

However, if below-normal temperatures were to continue through March and withdrawals followed the five-year maximum average level in 1Q2014, March storage ends with about 1,080 Bcf in the ground, "a scenario that could push prices above the $4.50 mark."

Winter weather variability by itself could swing demand, and storage levels, by more than 700 Bcf, the analysts estimated. There also is the possibility of more switching between gas and coal.

"Our models suggest that coal-to-gas displacement averaged 3.9 Bcf/d in 2013 and are currently factoring 2.0 Bcf/d for 2014," they said. The models account for changes in the U.S. power generation fuel mix with rising wind and solar, normal hydro and nuclear output that is similar to 2013.

"An uptick in prices will likely limit gas-fired generation beyond what our models are currently factoring in and could have as much as a 100-200 Bcf effect on end-of-winter storage levels, in our view," said analysts. Barclays in December forecast U.S. gas prices would average $3.88 in 2014 (see Daily GPI, Dec. 9, 2013).

If gas prices were to rally more and settle in the $4.50 range for a longer period, a drilling rebound might limit the upside, they said. "Persistent price strength is likely to incentivize more drilling, as many gas targets become economical in the $4.00-4.50 range and an even greater number would be attractive to drillers above $4.50. This dynamic, however, is likely to play out more slowly than changes in gas power burn."