Natural gas futures traded in negative territory most of Wednesday – and have declined all but three sessions so far this year – amid a persistently potent warm-weather pattern that squashed demand across much of the Lower 48.

At A Glance:

The February Nymex gas futures contract settled at $3.671/MMBtu on Wednesday, ultimately eking out a 3.2-cent gain day/day amid bargain buying in the final hour of the session. March rose 3.2 cents to $3.346.

NGI’s Spot Gas National Avg. lost 25.0 cents to $5.170.

Above average temperatures across much of the central, southern and eastern United States to kick off the new year – along with forecasts for more of the same next week – cut into heating demand and left markets expecting weak consumption for several more days.

EBW Analytics Group’s Eli Rubin, senior analyst, said this January is on pace to be among the warmest in nearly two decades. On a seasonal basis, he called temperatures “scorching” and said the “extent of near-term warming has slashed seasonal supply adequacy fears and Nymex risk premiums may struggle” more in coming days.

Against that backdrop, analysts are bracing for a markedly bearish storage print with Thursday’s Energy Information Administration (EIA) inventory report.

Reuters’ poll found a median withdrawal estimate of 15 Bcf for the EIA week ended Jan. 6. Predictions ran from an injection of 11 Bcf to a draw of 73 Bcf. The Wall Street Journal’s survey landed at an average draw of 13 Bcf. Estimates spanned pulls of 5 Bcf to 30 Bcf.

NGI modeled a pull of 14 Bcf. That compares with a five-year average draw of more than 150 Bcf.

It would also mark a sharp reversal from the end of 2022, when the government reported back-to-back steep pulls, including a withdrawal of 221 Bcf for the week ended Dec. 30. That lowered inventories to 2,891 Bcf, leaving stocks below the five-year average of 3,099 Bcf.

$2 Henry Hub Prices?

Analysts at Tudor, Pickering, Holt & Co. (TPH) said that, following the benign weather start to 2023, they modeled roughly 1.85 Tcf in storage exiting the winter withdrawal season, assuming normal weather for February and March. That’s up from previous estimates for inventories of around 1.65 Tcf.

The firm also noted recent strong production levels and their projections for further supply growth in 2023. “To that end, while we’d previously anticipated Henry Hub testing the low $3 range as we’d progressed through 2023 and a $2 handle tested in 2024, further supply growth and a slow start to winter could support testing a $2 handle to force a market rebalance earlier than anticipated — in 2H2023.”

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Additionally, while demand for U.S. LNG is strong and expected to expand ahead of next winter, American exporters have limited ability to increase shipments of liquefied natural gas. No new export facilities are slated to open this year and, in the near term, the Freeport LNG export plant in Texas, forced offline in June following a fire, remains out of commission. A spokeswoman said Wednesday the facility hopes to relaunch later this month. But after several delays last year amid regulatory challenges, analysts are dubious

Natural gas prices “are anticipated to remain weak around $3.50/MMBtu in North America” for the foreseeable future, “given limited expected U.S. export growth,” said Enverus Intelligence Research’s Dane Gregoris, managing director.

All of that noted, EBW’s Rubin pointed out that forecasts for the final week of January teased a fresh round of cold air. While still too soon for certainty, if the latest outlooks prove accurate, “a turn cooler into late January could help normalize supply/demand fundamentals.”

Analysts at The Schork Report agreed, noting Wednesday a shift in the jet stream may allow arctic air to drop into the Midwest and spread east. “Gas bulls have a glimmer of hope toward the end of this month,” they said.

Cash Prices Mixed

Spot gas prices varied by region on Wednesday but dropped at dozens of hubs throughout the Lower 48 amid mild weather that included above-average – and above-freezing – temperatures across much of the East. Highs in the 70s dotted the South, according to National Weather Service data.

Millennium East Pool shed 21.5 cents day/day to average $2.595, while Florida Gas Zone 3 fell 9.0 cents to $3.260 and Algonquin Citygate plunged $3.180 to $3.375.

Prices in California, while mostly declining on the day, remained elevated. Torrential rains that started last week and continued into Wednesday caused more flooding and mudslides. They also kept the air unseasonably cool.

This comes at a time when much of California is dependent on natural gas sent via pipeline from West Texas. However, following a 2021 explosion on Kinder Morgan Inc.’s El Paso pipeline in Arizona, delivery constraints fester and make it difficult to send more gas to Los Angeles and other major markets. The result: Relatively lofty prices throughout California.

SoCal Citygate lost $2.450 on Wednesday but still averaged $18.160. PG&E Citygate, meanwhile, ticked up 8.5 cents to $18.775.

Wood Mackenzie analyst Quinn Schulz said the messy weather in California is expected to continue, with another round of storms forecast to deluge the state beginning this weekend. The coming rains are expected “to linger in the state, with a focus on Northern California, until January 18,” Schulz said.

BTU Analytics’ Joe Warner, senior energy analyst, said other areas of the country, including the Northeast, recently grappled with comparable challenges following harsh snowstorms and freezes late in 2022. Should winter weather return to the eastern United States, wider delivery challenges could emerge early this year – and beyond.

It is “increasingly clear that severe weather events, whether frigid polar vortices or punishing summer heat waves, are a factor that grid operators will continue to contend with as they work to balance the flow of electricity,” Warner said.