Fading US demand outlook leads NYMEX January gas to nine-month low

The NYMEX Henry Hub January futures contract fell below $6/MMBtu on Dec. 5, to trade at its lowest since March as the market takes stock of another restart delay at the Freeport LNG terminal and shifting weather forecasts pointing to a milder start to December than previously anticipated.

After trading into the upper-$7s in late November, futures prices for January have fallen more than $2, or almost 30%, as the bullish short-term outlook for US gas supply and demand loses luster.

On Dec. 1, Freeport LNG confirmed news of another delay to its restart timing, saying that it was working with US regulators to secure all approvals required to resume production, likely by year-end.

The latest news from Freeport LNG represents at least the third delay to its restart timing, keeping the terminal's roughly 2 Bcf/d in feedgas demand since June when the facility was was rocked by a fire and subsequent explosion that immediately halted output.

For the US gas market, Freeport's closure has kept about 15% of domestic LNG export capacity idled. While previous delays to the terminal's restart have also put downward pressure on futures prices, the latest comes just as other supply-and-demand factors weigh on market sentiment.

Weather forecast

In its latest six- to 10-day outlook, the US National Weather Service said that it now expects above-average temperatures to prevail from Dec. 10-14 in states east of the Rocky Mountains where the vast majority of US heating demand is concentrated.

While the agency's longer-range outlook for Dec. 12-18 predicts closer-to-normal mid-December temperatures in most states east of the Rockies, the forecast still points to unseasonably warm weather in the upper Northeast and New England. Milder weather in the Midwest and the Northeast could depress residential-commercial in two key regions where heating demand often has an outsized impact on US gas market fundamentals in winter.

Over the next seven days, the US gas market is already projected to see below-average demand for gas-fired heating. From Dec. 6-12, US res-comm demand is projected to average just 35.1 Bcf/d, undershooting the prior five-year average by over 8 Bcf/d, or about 19%, according to a forecast from S&P Global Commodity Insights.

Storage

In addition to weaker demand, the outlook for US gas storage has already turned less-than-bullish recently. For the seven days ended Dec. 2, most analysts expect a sharp drop in storage withdrawals compared to the week prior, thanks to milder weather and lower demand in late November.

According to S&P Global Commodity Insights' latest storage and supply-demand model forecasts, total US inventories could fall by just 10-13 Bcf for the week ended Dec. 2. If accurate, a drawdown within that range would dramatically undershoot the five-year average storage pull of 49 Bcf and the year-ago drawdown of 59 Bcf in the corresponding week, EIA data shows.

Following a bullish start to the US heating season in November, US inventory levels fell to an 86 Bcf deficit to the five-year average late last month. Over the next two reporting weeks, S&P Global forecasts show that inventory shortfall being all but completely erased as comparatively small withdrawals allow US stock levels to catch up with historical estimates recorded in the corresponding week.