Warm Winters and the Freezing of Natural Gas Prices

In February, the Henry Hub natural gas spot price dropped below $3 per MMbtu—after 20 straight months above that mark—and has lingered there ever since.

Looking at the data, an analyst says the rough patch for natural gas prices will continue into the new year and expressed caution about 2025 as well.

“At the beginning of the year, we had a bearish tilt but expected most of the brunt to hit in 2024 versus 2023,” wrote Jean Ann Salisbury, senior analyst at Bernstein. “We forecast $4 (per MMBtu) in 2023 and $3.50 (per MMBtu) in 2024; those curves now suggest $2.54 and $2.65, respectively.”

U.S. natural gas prices surged in 2022 after Russia invaded Ukraine and European countries scrambled to find supplies elsewhere. The Henry Hub price hit a monthly average of $8.81/MMBtu in August of that year and was still at $5.53/MMBtu four months later in December.

According to Salisbury, two major events caused prices to fall in 2023: a warmer-than-expected January and February followed by a surprising surge in U.S. production in October and November of this year.

According to the National Oceanic and Atmospheric Administration, the average temperature across the contiguous U.S. from December 2022 to February 2023 was 34.9 F. The temperature was 2.7 degrees above average and ranked as the 17th warmest winter on record.

Gas usage dropped correspondingly. From January to February, the U.S. gas market used 300 Bcf less natural gas than normal. According to Bernstein’s forecasts, residential and commercial average usage in 2023 will drop by 1.2 Bcf/d for the year, while industrial demand is expected to finish at 100 MMcf/d less than average.

Bernstein analysts had forecast a drop in residential-commercial usage of only 0.7 Bcf/d as opposed to 1.2 Bcf/d, and an increase in industrial demand 600 MMcf/d, instead of the drop of 100 MMcf/d.

There were some brighter spots on the market. Natural gas exports to Mexico set a record monthly high average of 6.8 Bcf/d in June. Bernstein analysts expected imports would finish about 500 MMcf/d higher than the five-year average. The power industry also used an average of 2.3 Bcf/d more natural gas than the five-year average. However, the increase may have been tied to a deep supply of cheap gas available for power companies to access during the summer.

“It was not hotter than normal, so we believe this was [usage based] mostly on lower price,” Salisbury wrote.

October surge

As fall began, natural gas companies ramped up production and, “partly due to waiting on midstream and partly due to holding back production during the low-priced shoulder month (September), added nearly 5 Bcf/d for the last quarter of the year, sinking the 2024 curve,” Salisbury wrote.

The Permian Basin led the production increase. In 2022, Permian companies produced an average 20.7 Bcf/d of gas, the number is expected to increase to 23.2 Bcf/d for 2023. An earlier-than-expected restart of the El Paso Natural Gas pipeline encouraged basin production, as the line takes Permian gas westward to needy markets on the West Coast.

However, while more gas flowed west, more natural gas also went into storage. By mid-December, the U.S. Energy Information Administration reported 3,577 Bcf was in U.S. storage facilities—8.5% higher than the five-year average. Bernstein analysts forecast December storage numbers will set a record for the month.

The high storage follows that a mild November and December to end 2023 have resulted in natural gas demand for heating. While international demand for U.S. LNG remains high, problems with export processing facilities have created bottlenecks.

“LNG utilization rates have been lower than expected at Calcasieu Pass and Sabine Pass due to maintenance and at Freeport due to the delayed startup,” Salisbury wrote.

Bernstein analysts expect natural gas prices to stay flat for most of 2024, and, depending on the startup timeline of new LNG facilities, may remain flat going into 2025.

“Looking forward, at the current 2024 strip of $2.65, we believe only associated gas will grow in 2024 (at about 2 Bcf/d). This will be paired against flattish demand until LNG starts up in late 2024, suggesting very full storage a year from now,” Salisbury wrote. “This should start to weigh on 2025 price as storage fills, and we remain cautious versus the strip for 2025.”