Natural gas rally continues as weather outlook remains bullish
The February Henry Hub contract expired this week, making March the new prompt contract. February rolled off near contract highs, settling at $7.46/MMbtu, the highest monthly Henry Hub settlement since 2022. March became prompt at $3.92/MMbtu, but finished the week up 70c at $4.30/MMbtu. Meanwhile, prices for next summer and winter both rallied. Summer ’26 gained 41c to settle at $4.30/MMbtu, and Winter ‘26/’27 rose 33c to finish at $4.70/MMbtu. These are the highest levels for the next summer and winter strips since early December.
Near-term fundamentals have begun to normalize in the aftermath of winter storm Fern, which pushed weather-driven demand to seasonal highs, shut off significant amounts of supply, and sent gas prices higher. Res/com, industrial, and power demand peaked last weekend, at a combined total of 143 Bcf/d, according to data from S&P. Dry gas production dropped to a low of 97 Bcf/d as gas wells froze in several producing regions from the South Central to the Northeast. Increased imports from Canada and reduced utilization at LNG export plants helped balance supply-demand, but the withdrawal from underground storage was still massive. It is likely that 350+ Bcf was pulled from storage this week, which will be reported by the EIA next Thursday.
While this week’s storm drove the February contract’s gains, the two-week forecast still looks bullish, lending further support to the March contract. As of this morning, Lower-48 population-weighted average temperatures are forecast to be 5-10 ºF below the ten-year average for the entirety of the two-week forecast period, although not quite as cold as last weekend. If these forecasts pan out, this will drive a continued erosion of gas inventories. After the warm start to January, storage is back above the five-year average, but this surplus will be erased and turned into a sizeable deficit over the next several EIA reports. This has major implications for gas prices this summer and next winter. Our model projects inventories at the start of summer being about 300-350 Bcf below the five-year average. This is a major shift from just a few weeks ago when it looked like inventories would follow a relatively neutral path this summer. Barring any bearish shifts in the demand outlook, this would likely mean a material amount of power demand needs to be shut off this summer or that supply needs to grow materially in advance of next winter. It appears the market is trying to balance this with the rally in forward prices encouraging these factors.
Natural Gas Factors
Price Trend. (Bearish, Priced In) Gas prices have turned sharply lower over the past week, after rallying to as high as $5.50/MMbtu at the start of the month. The Jannuary contract is down more than $1 over the past two weeks.
Winter S&D. (Bullish, Surprise)
Storage Level. (Bearish, Priced In) The storage level is a bearish priced-in factor due to the high levels of gas in inventories relative to the five-year average. According to the latest EIA weekly natural gas inventory report, the surplus to the five-year average stands at 32 Bcf above the five-year average but 61 Bcf below last year.
Associated Gas Production.(Bearish, Priced In) Growth in associated gas production will be much slower than has beeen seen over the past few years, at least until the second half of 2026. Pipeline capacity out of the Permian Basin will begin to grow again next year, likely filling relatively quickly. These new Permian pipes should enter servicce around the same time as projects which will reroute gas around Houston, towards the border of Louisiana.
LNG Outages. (Bearish, Surprise) Feed-gas levels are at their near max capacity, and if there's any unplanned maintenance event or an outage, it may act as a surprise bearish factor for natural gas prices.
Slow Supply Response (Haynesville). (Bullish, Surprise) If production remains near where it is currently and does not grow into winter, this would be a bullish factor for gas prices. As production growth in the Permian and Northeast should be relatively constrained by pipeline capacity until the second half of 2026, the Haynesville will likely be the primary engine of production growth in the near-term. After being flat through most of 2025, Haynesville production and drilling activity has begun to increase this summer. Production is now up about 1.5 Bcf/d from the start of the year, but remains down from levels seen two years ago.
LNG Schedule. (Bullish, Mostly Priced In) With a significant amount of new LNG feedgas demand coming this year and the next few years, if these facilities startup sooner than anticipated it should be a bullish factor for gas prices. One example of this occuring is the recent startup of Plaquemines LNG, which saw feedgas levels reach more than 1 Bcf/d much sooner than anticipated.
Hedge Activity. (Bearish, Priced in) With prices for next winter and beyond continuing to trend higher, producers have been hedging into the strength of forward prices.
Winter Weather. (Neutral, Surprise) While the first half of December came in significantly colder than average, the second half of the month is forecast to be warmer than average. Based on our modeling, if weather comes in equivalent to the ten-year average, inventories would tighten to the five-year average. Therefore, anything colder than the ten-year average would be particularly bullish.
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