Severe U.S. Winter Weather Breaks Consumption Record, Natural Gas Prices Drop

Severe winter weather in the United States during mid-January led to a surge in natural-gas consumption, setting a new monthly record. Surprisingly, despite this increased demand, prices for the heating fuel have hit their lowest point since April. Many traders are puzzled by this development.

According to FactSet data, on Tuesday, the March contract for natural-gas futures (NGH24, -3.70% NG00, -3.70%) fell 7 cents, or 3.5%, settling at $2.01 per million British thermal units. This marked the lowest finish for a front-month contract since mid-April.

The drop in prices can be attributed to a "lack of new buying interest and the resilience of short sellers," stated Brian Swan, a senior commodity analyst at Schneider Electric, in a daily note.

Swan explained that mild weather forecasts are keeping the national demand for natural gas low, thereby maintaining low prices for the March contract. However, he also noted that colder conditions predicted for mid-February might increase demand later this month.

Traders are now adjusting their strategies in response to changing weather forecasts. Swan indicated that while recent cold predictions in February could temporarily boost the market, they are unlikely to alter the overall downward trend.

In a monthly report released on Tuesday, the Energy Information Administration (EIA) revealed that U.S. dry natural-gas production, which refers to consumer-grade natural gas, declined to 102 billion cubic feet per day in January. This marked a decrease from the previous monthly record of 106 billion cubic feet per day in December.

However, despite the dip in production, natural-gas consumption surged to 118 billion cubic feet per day in January, setting a new record for any month, according to the EIA.

A Burst of Cold Weather Increases Demand for Heating

A recent surge in cold weather has led to a higher demand for heating and a decrease in natural-gas production, resulting in significant withdrawals from inventory, according to a report by the EIA.

Despite the high inventory withdrawals witnessed in January, the EIA remains optimistic that domestic natural-gas inventories will remain higher than the previous five-year average. They project a 15% increase in natural-gas inventories at the end of this winter compared to the five-year average, citing forecasts for milder weather.

However, the EIA predicts that domestic natural-gas consumption will decline below the average for February and March due to the expected milder weather during these months.

Forecasts indicate that there will be 4% fewer heating degree days in February and March compared to the average of the past decade. Heating degree days measure how cold a location is over a specific period relative to a base temperature.

Given this outlook, the government agency anticipates that U.S. spot natural-gas prices will average $2.65 per million British thermal units in 2024, a slight decrease of 0.2% from the previous forecast released in January. For 2025, they forecast an average price of $2.94, down 0.1% from the previously predicted figure.

Joe DeCarolis, the EIA administrator, expressed his views on the situation in a press release: "The cold weather last month resulted in record-setting natural gas consumption for a few days, but we anticipate below-average consumption in February and March." DeCarolis also cautioned that unexpected cold snaps later in winter could reintroduce significant volatility into the natural gas market.