US Central spot gas prices set to rise as forecast colder weather, higher demand nears

A stretch of above-average temperatures in the US Midwest and Midcontinent regions so far this December has led to lackluster demand and muted spot gas prices, a trend that might shift in coming weeks as forecasts show colder weather entering the scene.

The National Weather Service's six- to 10-day and eight- to 14-day outlooks both show a likelihood of near- or below-normal temperatures across the Central states in the near term.

The agency's outlook resonates with a similar forecast from S&P Global Platts Analytics and CustomWeather, which predicts temperatures falling sharply in both regions over the next two weeks.

The latter forecast shows the average Midwest temperature remaining below freezing for the foreseeable future, with the average regional temperature falling into the low 20s degrees Fahrenheit on some days. The Midcontinent's temperature drop will be even starker albeit delayed to the start of January, with the region's average temperature forecast to fall into the 20s and 30s F Jan. 1-11 from 51 F Dec. 31.

Colder weather ahead

The expected colder weather would sharply contrast against the warmer ranges observed recently.

The average temperature in the Midwest came in six to 13 degrees above normal Dec. 25-27, while the average Midcontinent temperature has been 12-19 degrees above normal for the same days.

The warmer-than-normal weather, which has spanned most of the month, has kept December gas demand in both regions lower than recent years, according to Platts Analytics data.

Gas demand in the Midcontinent and Midwest is on track for the weakest December since 2015, averaging 20.3 Bcf/d Dec. 1-28, up just 6% from November demand. In 2020, the Central regions' collective gas demand jumped 32% in December from November levels.

Light winter gas demand has taken the foot off the gas on regional spot gas prices, with prices falling below $4/MMBtu in December after a month-long run in the $4-$6/MMBtu range.

The Midwest's cash Chicago city-gates has averaged $3.62/MMBtu so far this month, down from $4.86/MMBtu in November and $5.29/MMBtu in October.

In the Midcontinent, NGPL Midcontinent has averaged $3.43/MMBtu so far this December, after averaging $4.72/MMBtu in November and $5.16/MMBtu in October.

Outlook

The mild December has led to more gas flowing into regional storage, which could provide some padding for prices against higher demand. Gas stocks in the Midwest region sat at 963 Bcf as of the week ended Dec. 17, according to the most recent Energy Information Administration weekly storage report, which is a 1% surplus to the five-year average. As of the week ended Dec. 3, Midwest gas storage levels were at a 1.7% deficit to the five-year average.

Even so, buoyant futures pricing shows substantially higher pricing ahead.

The Chicago city-gate's January contract was trading at a $1.59 premium to Henry Hub in Dec. 28 trading on the Intercontinental Exchange. This is more than six times the 25-cent premium cash Chicago city-gates had on cash Henry Hub at preliminary settlement Dec. 28.

NGPL Midcontinent's January contract was trading at a $1.17 premium in Dec. 28 trading, up from the 1.50-cent premium to cash Henry Hub observed at the spot location's Dec. 28's preliminary settlement.