In the latest report from the Energy Information Administration (EIA), it has been revealed that U.S. natural-gas supplies in storage have seen their largest weekly decline in almost three years. Despite this significant decrease, natural gas prices for February delivery have not rallied as expected.

Decline in Natural Gas Inventories

Data from the EIA shows that natural-gas inventories in domestic storage fell by 326 billion cubic feet for the week ended January 19th. This brings the total working gas inventories to 2.856 trillion cubic feet, marking the largest weekly decline since the notable "Great Texas Freeze" of February 2021, when inventories dropped by 338 billion cubic feet (bcf).

Impact on Natural Gas Futures

On Thursday, natural gas futures for February delivery traded at $2.582 per million British thermal units on the New York Mercantile Exchange, experiencing a decline of 5.9 cents, or 2.2%. Despite worries of a possible record draw in natural-gas storage, the lack of a more shocking headline draw in inventories has led to a reversal of earlier gains in nat-gas futures, according to Tyler Richey, co-editor at Sevens Report Research.

Supply and Demand Analysis

The weekly decline in natural-gas inventories aligns with the average forecast predicted by analysts surveyed by S&P Global Commodity Insights. Furthermore, it is noteworthy that the decline is more than double the average withdrawal of 148 bcf for the third week of January over the past five years. By comparison, a year ago at this time, the EIA reported a supply decline of 86 bcf.

Despite the significant drop in inventories following a week plagued by frigid temperatures across the country, gas in storage still remains above-average levels. In fact, it stands at 142 bcf above the five-year average and 110 bcf above year-ago levels, as stated by Troy Vincent, senior market analyst at DTN.

U.S. Dry Natural-Gas Production Declines Amidst Production "Freeze-Offs"

U.S. dry natural-gas production witnessed a decline to 88 bcf per day on Jan. 16, down from the 30-day average of 105 bcf per day due to production freeze-offs seen in the Permian Basin, the Midcontinent, and the Haynesville, based on data cited by the S&P Global Commodity Insights survey. The Haynesville, located in Northwest Louisiana and East Texas, is a dry natural-gas formation.

Increasing U.S. Consumption of Natural Gas

On the other hand, U.S. consumption of natural gas rose to 123.4 bcf for the week of Jan. 11-17, which is an increase from 102 bcf the previous week and 95.4 bcf compared to a year ago, according to EIA data.

Volatility in Prices

Prices have proven to be volatile during this winter season, fluctuating significantly in response to weather forecasts.

"Naturally, natural-gas prices are more prone to volatility in winter due to weather-related disruptions," commented Vincent.

Nevertheless, despite record-high production, a 3% decrease in heating-degree days compared to last year and a 5% decrease compared to the five-year average, along with temperature forecasts indicating above-average temperatures across most of the U.S. until the first week of February, there seems to be limited potential for an increase in natural-gas prices this winter, as noted by Vincent.

The EIA reported that U.S. dry natural-gas production reached an all-time monthly high of 105.5 bcf in December 2023 for the lower 48 states, using data from S&P Global Commodity Insights.

Future Outlook and Weather Impact

Looking ahead, prices will largely depend on weather conditions and potential cold spells. Tariq Zahir, managing member at Tyche Capital Advisors, stated that if another significant dip in the jet stream occurs, bringing colder air down from Canada, it could potentially lift the roller-coaster ride of natural-gas prices.

According to S&P Global Commodity Insights, their natural-gas supply-demand model predicts a sizable withdrawal of 228 bcf from U.S. gas storage for the week ending Jan. 25. If this prediction holds true, the drawdown would surpass the five-year average by 43 bcf, or approximately 23%, and be more than 60% larger compared to last year's withdrawal estimate of just 141 bcf, according to EIA data as cited by the research provider.

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