Why Natural Gas Prices Are Sliding Lower Amid Elevated Production and Mild Weather Expectations

Natural gas faced continued downward pressure on Friday, with February Nymex contracts (NGG26) declining 0.068 points or 1.84%, extending this week’s selloff to reach a 2.25-month low for the nearest-futures contract. The primary catalysts behind the price slide stem from both supply-side pressures and demand-reducing weather patterns.

Supply Surge Overwhelming Market Dynamics

US natural gas production remains near record levels, creating structural headwinds for price recovery. The Energy Information Administration (EIA) revised its 2025 production forecast upward to 107.74 bcf per day in December, up marginally from 107.70 bcf/day estimated in November. Lower-48 dry gas output reached 110.0 bcf/day on Friday, representing a 4.4% year-over-year increase, according to BNEF data. The drilling sector supports this elevated output, with US natural gas rigs recently hitting 2-year highs, though Baker Hughes reported a slight -2 rig decline to 125 units in the week ending January 2—still substantially elevated compared to September 2024’s 4.5-year low of 94 rigs.

Inventory Levels Signal Ample Supplies

Inventory management data reveals ample supply conditions. The EIA’s weekly report showed natural gas inventories fell by 38 bcf for the week ended December 26, notably softer than both market consensus expectations of 51 bcf and the historical 5-year weekly average draw of 120 bcf. Current inventory levels sit 1.1% below year-ago comparisons yet remain 1.7% above the 5-year seasonal norm, indicating comfortable supply cushions. European storage presents a starker picture, with gas facilities at 62% capacity versus the typical 74% seasonal average for this period.

Weather Forecasts Reduce Heating Demand

Above-normal temperatures across the US provide additional bearish impetus. Atmospheric G2 forecaster highlighted expectations for significantly warmer-than-normal conditions spanning the eastern two-thirds of the nation during January 7-11, with similar warmth forecast for the north-central region January 12-16. This weather pattern is expected to suppress heating demand and further boost already-ample storage levels.

Balancing Act: Production Against Demand

Lower-48 demand registered at 101.0 bcf/day Friday (+0.3% y/y), while LNG export flows to US terminals averaged 19.6 bcf/day (+1.9% week-over-week), according to BNEF. Electricity generation provided modest support, with US lower-48 output rising 2.3% year-over-year to 85,330 GWh for the week ending December 6, per Edison Electric Institute data.

The convergence of elevated production, comfortable inventory positioning, and demand-dampening weather forecasts suggests natural gas prices may face continued pressure in the near term.