ARKANSAS, Nov 07 (Future Headlines)- US natural gas futures took a substantial hit, declining by approximately 7% to reach a one-week low. The dip was driven by the combination of record-high natural gas production and forecasts of mild weather persisting through late November. The latter has resulted in reduced heating demand, allowing utilities to continue injecting gas into storage for at least a few more weeks.

Weather forecasts in the near term have been revised to project milder conditions. The ongoing El Nino suggests that warm winter temperatures are anticipated over an extended time frame. These factors have contributed to the decline in heating demand.

Energy consulting firm Gelber and Associates noted that these warm forecasts, combined with the lack of a storage report from the US Energy Information Administration (EIA) due to a scheduled systems upgrade, have added to market volatility. The EIA is expected to resume its regular schedule on November 13.

In response to these developments, front-month gas futures for December delivery on the New York Mercantile Exchange fell by 25.1 cents, marking a 7.1% decrease, and settling at $3.264 per million British thermal units (mmBtu). This closing price represented the lowest level since October 27 and the most significant one-day percentage decline since May 22.

  • Spot Prices and Contango Dynamics

A bearish factor that has weighed on the natural gas futures market throughout the year has been the consistently lower spot or next-day prices observed at the Henry Hub benchmark in Louisiana. Data from financial firm LSEG indicates that the spot market has traded below the front-month futures on 176 out of 212 trading days so far in 2023.

Next-day prices at the Henry Hub fell by approximately 4% to reach $3.00 per mmBtu for Monday. The market’s persistent contango structure, with second-month prices exceeding front-month prices, has incentivized traders. They can lock in arbitrage profits by purchasing spot gas, storing it, and selling a futures contract, especially when spot prices remain sufficiently below the front-month prices to cover margin and storage costs.

The contango spread between the front-month and second-month reached a record high for the third consecutive day, with the premium of January futures over December expanding to around 30 cents per mmBtu. This premium could encourage some speculators to store natural gas for an extended period in anticipation of higher prices later in the winter. However, utilities are expected to begin withdrawing gas from storage in mid to late November when daily heating demand for the fuel is projected to surpass production levels.

  • Supply and Demand Dynamics

LSEG reported that average gas output in the Lower 48 US states increased to 107.3 billion cubic feet per day (bcfd) thus far in November, up from the record 104.2 bcfd observed in October. On a daily basis, output reached a new all-time high of 108.0 bcfd on a Saturday, surpassing the previous record of 107.7 bcfd set just two days earlier on November 2.

Meteorologists anticipate that the weather will shift from warmer than normal from November 6 to 11 to near normal from November 11 to 14 and then return to warmer than normal from November 15 to 21. With seasonally colder weather approaching, LSEG forecasts an increase in US gas demand in the Lower 48 states, including exports. It is expected to rise from 101.5 bcfd during the current week to 109.2 bcfd next week. This revised forecast for next week is higher than LSEG’s earlier outlook from Friday.

Moreover, gas flows to the seven major US liquefied natural gas (LNG) export facilities have risen to an average of 14.3 bcfd thus far in November. This marks an increase from the 13.7 bcfd observed in October and surpasses the previous record of 14.0 bcfd set in April.

Reporting by Moe Khaled; Editing by Sarah White