Warm Winter Forecast Sends Natural Gas Futures Spiraling Lower Amid Production Surge

January Nymex natural gas futures experienced a sharp pullback on Friday, closing down 0.118 points or 2.79%, marking a continuation of this week’s downward momentum that pushed prices to their lowest level in six weeks. The primary culprit behind the selloff traces back to meteorological predictions of above-normal temperatures across major portions of the continental United States, which threaten to suppress heating demand and trigger widespread liquidation activity among long-positioned traders.

Atmospheric G2’s latest forecast indicates that warmer-than-average conditions will persist across western, central, and southern regions through December 21, with the southern half of the nation experiencing particularly pronounced above-average warmth from December 22-26. These warmer conditions are expected to dampen the seasonal heating demand that typically supports natural gas consumption during winter months.

Production Levels Remain Near Historic Highs

Adding downside pressure to an already-challenged market, the Energy Information Administration revised its 2025 natural gas production outlook upward this week. The EIA increased its forecast to 107.74 bcf per day from November’s estimate of 107.70 bcf per day. The US nat-gas sector continues operating near record production levels, with active drilling rigs recently hitting 2-year highs. This elevated supply backdrop creates an unfavorable dynamic for prices, particularly when demand headwinds from warmer forecasts emerge simultaneously.

According to Bloomberg NEF data from Friday, lower-48 dry gas production reached 112.5 bcf per day, representing a 7.1% year-over-year increase. However, demand metrics paint a different picture, with Lower-48 gas consumption at 110.6 bcf per day, down 3.4% year-over-year. The divergence between rising production and declining demand illustrates the structural pressure on pricing across regional markets including average gas price levels throughout Virginia and other demand centers.

Storage and Export Dynamics

LNG export activity showed modest declines, with estimated net flows to US export terminals reaching 18.1 bcf per day on Friday, down 3.0% week-over-week. This softer export demand, combined with rising production, exacerbates the bearish equation for nat-gas futures.

The weekly EIA inventory report released Thursday initially provided some price support, as natural gas storage declined by 177 bcf for the week ended December 5, exceeding the market consensus estimate of 170 bcf draw and significantly outpacing the 5-year average weekly withdrawal of 89 bcf. As of December 5, total inventories remained flat year-over-year but stood 2.8% above their 5-year seasonal average, suggesting adequate supply conditions throughout the market.

Drilling Activity Reflects Market Conditions

The number of active US natural gas drilling rigs declined by 2 units to 127 rigs in the week ending December 12, according to Baker Hughes data. Despite this slight decrease, activity remains near the 2.25-year peak of 130 rigs established on November 28. The year-over-year comparison demonstrates significant improvement, with rig counts up substantially from September 2024’s 4.5-year low of 94 units.

Mixed Signals from Electricity Sector

The Edison Electric Institute reported that US electricity generation for the week ended December 6 climbed 2.3% year-over-year to 85,330 GWh. For the full 52-week period ending December 6, output rose 2.84% year-over-year to 4,291,665 GWh. This sustained electricity demand provides some underlying support for the natural gas complex, though it appears insufficient to counteract the weather-driven and production-led headwinds currently dominating market sentiment.

European gas storage provided additional context on global demand conditions, standing at 71% capacity as of December 10, materially below the 5-year seasonal average of 81% for this time of year, reflecting stronger consumption pressure across the Atlantic even as North American markets struggle with supply abundance.