NYMEX gas futures market teeters as mild weather persists, supply gains mount

After cratering below $4/MMBtu, winter gas prices at the US benchmark Henry Hub look increasingly vulnerable to additional downside risk as mild weather forecasts, an emerging gas storage surplus and continued growth in drilling activity put new pressure on the domestic market.

On Dec. 23, renewed downward risk for winter prices was already apparent as NYMEX prompt-month futures tested lows not seen since July at under $3.60/MMBtu, data from CME Group showed.

Intraday lows recorded during the morning session came as traders sold down the market amid uncertainty ahead of the US Energy Information Administration's latest gas storage report, released at 10:30am ET. Following its release, the January futures contract rebounded sharply, rising into the $3.70s/MMBtu.

Market jitters also came ahead of a holiday weekend that's largely expected to bring mild weather to key heating-demand regions including the US Northeast and the Midwest.

Weather, demand

In New York City, temperatures are forecast to average almost 42 degrees F through late December – about 5 degrees above normal. In Chicago, temperatures should average nearly 40 F over the next week, or about 13 degrees above normal, weather data compiled by S&P Global Platts Analytics showed.

In the National Weather Service's latest eight to 14-day outlook, published Dec. 22, much of the eastern US is expected to see an elevated risk for above-average temperatures. Over the same period, a sizeable portion of the Midwest could see colder-than-average weather.

At the US level, though, heating demand is still expected to underperform through late December, averaging 38.4 Bcf/d – about 6.5 Bcf/d, or almost 15% below average.

Another disappointing week for gas demand adds to an already historically weak heating season. Since the start of November, residential-commercial demand has trended almost 2.7 Bcf/d or more than 7% below the prior five-year average, Platts Analytics data shows.

Supply growth

On Dec. 23, the EIA's latest gas storage report revealed another undersized inventory addition of just 55 Bcf for the week ended Dec. 17. The injection undershot the five-year average by some 98 Bcf, erasing this season's long-standing storage deficit which had ballooned to over 235 Bcf in September.

While mild weather promises to deliver more undersized injections over the coming weeks, likely expanding the US inventory cushion, continued growth in drilling and production also promises to bring more domestic supply online in the New Year.

For the week ended Dec. 22, the US drilling rig count was estimated at 719, marking its highest since early April 2020. Seven rigs were added in the Haynesville, lifting the count there to a 31-month high. In the Marcellus, two rigs were added to bring the basin's total to 37 – also the highest count since April 2020, data published by Enverus showed.

The continued expansion in drilling activity in late 2021 is already having a bottom-line impact on production as output from basins like the Permian, the Haynesville and the Marcellus continue to lead upstream growth. On Dec. 23, US production was estimated at over 95.6 Bcf/d marking its highest since the pre-pandemic days of late February 2019, Platts Analytics data showed.