As forecasts continued to offer signs of a chillier start to 2022, natural gas futures advanced in early trading Monday. The January Nymex contract was up 14.8 cents to $3.879/MMBtu at around 8:50 a.m. ET, albeit well off the $3.979 high reached in off-hours trading over the weekend.

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At A Glance:

  • EIA shows stocks at surplus to five-year average
  • Cold Canadian air not seen moving deep into U.S.
  • Mild near-term outlook sinks spot gas prices

This was after natural gas futures took a major step back Thursday as an upcoming cold snap was seen not packing quite as much punch as initially expected. Though the latest government inventory data showed continued tightness, the January Nymex gas futures contract settled 24.5 cents lower day/day at $3.731/MMBtu. The February contract dropped 23.0 cents to $3.630.

Spot gas – which traded Thursday for gas delivery through Monday – also plummeted amid a mild near-term outlook that combined with the typical lull in demand seen around the holidays. NGI’s Spot Gas National Avg. tumbled $1.145 to $4.005.

As for futures action, there is significant risk in holding positions ahead of the long Christmas break, but the latest weather data left too much to be desired in the early-January outlook. NatGasWeather said both the Global Forecast System (GFS) and European model shed a decent amount of demand overnight for the important Jan. 1-6 period after trending colder on Wednesday. And while the midday GFS gained back a few heating degree days (HDD) for the period, it still wasn’t as cold as it had been.

Both models still forecast strong demand the first week of January, “just not as impressive with the intensity of cold compared to prior runs,” according to NatGasWeather. That said, a slight shift north or south with the frigid cold pool over southern Canada during the Jan. 1-7 period, and U.S. demand could plummet or spike in response.

“To our view, we expect there will still be enough cold air over the northern U.S. for strong demand the first week of January, just difficult to know exactly how much subfreezing air will ultimately arrive,” NatGasWeather said.

Importantly, the forecaster said there’s better odds of a hard freeze into Texas this year compared to normal years. “There’s some potential it eventually occurs in the first half of January based on the coming pattern.”

Even without a hard freeze in Texas, the coming chill in January could leave a big red mark on production. Freeze-offs are likely in regions where the frigid air could arrive, including the Rockies, the Bakken Shale and the Midcontinent.

EBW Analytics Group pointed out that January production has declined month/month in four of the past five years. While extreme freeze-offs akin to February’s Winter Storm Uri remain extremely unlikely, “more modest, short-lived production declines may occur with widespread mid-January cold, further tightening the market to support elevated prices,” EBW senior analyst Eli Rubin said.

EBW noted that forecaster DTN’s Week 4 forecast calls for further expansion of cold anomalies into mid-January, adding nine HDDs and 2.3 Bcf/d of gas demand versus the first week of the new year. From a meteorological standpoint, a slowly progressing Madden Julian Oscillation (MJO) favors unleashing cold currently bottled up in central and western Canada southward across the Lower 48.

“While the MJO has been progressing rather slowly, cold may peak during early- to mid-January before fading later in the month,” Rubin said.

Is The Market Still Tight?

The lack of impressive cold thus far in the winter season has helped stave off supply concerns in the United States, but the latest federal inventory data continued to show some tightness in the supply-demand balance.

The Energy Information Administration (EIA) said inventories for the week ending Dec. 17 fell by 55 Bcf. The draw came in more or less in line with expectations ahead of the report, with analysts projecting a pull in the low to mid-50s Bcf.

However, Bespoke Weather Services said its modeling still shows the market as tight relative to the five-year average – “rather easily.” The big problem is that weather demand needs to show up in the forecast. “If it does, we can rally,” the forecaster said.

The Midwest led the country in withdrawals, pulling 19 Bcf out of storage, according to EIA. The Pacific withdrew 14 Bcf, and the Mountain region pulled 11 Bcf. East stocks fell by 9 Bcf.

In the South Central, EIA recorded a net 3 Bcf decline in inventories, which included a 9 Bcf draw from nonsalt facilities and a 6 Bcf injection into salts. The net draw was a bit of a head scratcher for some market analysts, who had projected a smaller build into salt facilities.

But Bespoke said wind generation was the culprit, and the current week has seen a substantial decline in wind output. This, along with a precipitous rise in liquefied natural gas (LNG) exports and stronger heating demand week/week in the residential/commercial sector are pointing to a much steeper drawdown in stocks in the next EIA report. Early estimates are for the first triple-digit draw of the season, in the 140s Bcf to 150s Bcf.

As of Dec. 17, total working gas in storage stood at 3,362 Bcf, which is 234 Bcf below year-ago levels and 34 Bcf above the five-year average, according to EIA.

Once the calendar flips to 2022, withdrawals should gather momentum with the holiday demand lull in the rear view mirror. Furthermore, Bespoke said there is plenty of cold air on the maps and signals from tropical forcing suggest some risk to the cold side heading into early January.

“Obviously, the failure of this to show up, so far, has our confidence lower, as well as the fact that this is a long weekend,” the firm said. “But, if any cold finally does progress forward over the weekend, we still feel we can rally back to $4.00 in the prompt-month January contract heading toward its expiration.”

Cash Falling Like Dominoes

With national demand expected to remain light throughout the Christmas holidays, spot gas prices crumbled from recent highs.

A massive sell-off took place in New England, where snow was possible over the four-day stretch into Monday. However, Santa also was expected to bring plenty of sunshine, and daytime temperatures were forecast to flirt with the 50-degree mark by Sunday.

As such, Algonquin Citygate spot gas prices tumbled $7.245 to average $7.335 for gas delivery through Monday. Tenn Zone 6 200L plunged $7.740 to average $6.675.

Other Northeast points posted steep declines as well, which extended farther upstream into Appalachia. There, Texas Eastern M-3, Delivery dropped $1.015 to average $2.560 for the four-day gas delivery period.

In the Southeast, Cove Point lost $1.050 to average $3.205, while in Louisiana, benchmark Henry Hub fell 47.0 cents to $3.515.

Steep double-digit price decreases were the norm across the country, while West Coast markets recorded more robust losses amid a very soggy outlook for the long holiday weekend. El Paso Bondad dropped 86.0 cents to average $5.950 for gas delivery through Monday. PG&E Citygate plunged $1.320 to $6.560 for the four-day gas period, with a similar $1.00-plus drop seen in Southern California.