Natural Gas Faces Persistent Downside as Storage Report Signals Oversupply Conditions

Natural gas prices experienced a sharp selloff on Wednesday, with February Nymex futures (NGG26) closing down -0.286, representing a 7.20% decline and marking the lowest level in two months. The weakness stems from a confluence of bearish factors centered around abundant supplies and weakening demand fundamentals revealed in the latest storage report.

Storage Inventory Data Disappoints, Reinforcing Supply Glut

The weekly EIA natural gas storage report proved particularly negative for price momentum. Inventories fell by just -38 bcf for the week ended December 26—substantially smaller than market expectations of -51 bcf and dramatically below the 5-year average weekly draw of -120 bcf. This modest inventory reduction signals an underlying surplus situation in the market.

The overall inventory picture reinforces supply abundance concerns. As of December 26, storage levels were down only -1.1% year-over-year and remain elevated at +1.7% above the 5-year seasonal average. These metrics indicate that natural gas storage levels remain ample relative to historical norms, constraining upside potential for prices.

Production Remains Robust Despite Market Weakness

Supply-side pressures continue mounting, with US natural gas production reaching near-record highs. The EIA has raised its 2025 production forecast to 107.74 bcf/day from a prior estimate of 107.70 bcf/day, reflecting sustained output strength. Lower-48 dry gas production currently stands at 113.8 bcf/day, up 7.6% year-over-year according to BNEF data.

Active US natural gas drilling rigs, a key leading indicator, recently approached a 2-year high. Baker Hughes reported 125 active rigs in the week ending January 2, down modestly by -2 rigs from the prior week. Though slightly below the 2.25-year peak of 130 rigs reached on November 28, the rig count remains substantially elevated compared to the September 2024 trough of 94 rigs—demonstrating the sector’s production-oriented posture.

Temperature Forecasts and Demand Dynamics Deteriorate

Accelerating price losses Wednesday were directly tied to adverse weather patterns and demand implications. Atmospheric G2 reported a significant warming shift across the eastern two-thirds of the US for January 5-9, with temperatures expected to trend warmer through January 10-14. Above-normal temperatures are projected to substantially reduce natural gas heating demand during the critical winter months.

Lower-48 demand currently registers at 106.1 bcf/day, up 24.2% year-over-year, but warmer-than-normal forecasts threaten to cap demand growth. LNG export activity remains strong at 19.9 bcf/day net flows to US terminals (up 7.1% week-over-week), yet the combination of production strength and weakening heating demand tilts the fundamental balance toward oversupply.

Broader Energy Context Offers Limited Support

US electricity output data provides modest support, with the lower-48 generating 85,330 GWh in the week ended December 6 (+2.3% y/y), according to Edison Electric Institute. The 52-week electricity output totaled 4,291,665 GWh (+2.84% y/y), suggesting steady underlying energy demand. However, these gains prove insufficient to offset the headwinds from abundant natural gas storage and warm weather forecasts.

European gas storage presents a contrasting picture, sitting at 64% capacity as of December 28 versus the 5-year seasonal average of 75%, suggesting relatively tighter conditions internationally. Nevertheless, this regional dynamic does little to support North American natural gas prices faced with domestic oversupply signals.