Why Are Natural Gas Prices Falling? Warm Weather and Rising Production Drive Decline

Natural gas prices have been under pressure in recent weeks, with February Nymex futures (NGG26) closing down significantly to post a 2.25-month low. The decline reflects a perfect storm of downward pressure: forecasts of warmer-than-normal temperatures across much of the US, combined with near-record production levels and ample storage supplies. Understanding these interconnected factors reveals why natural gas prices have moved lower despite broader energy market volatility.

Above-Normal Temperatures Cut Into Heating Demand

The primary catalyst for recent natural gas price weakness stems from weather patterns. Forecasters had projected much warmer-than-normal conditions across the eastern two-thirds of the United States, with temperatures expected to run above seasonal norms through mid-January. This warmth, accompanied by additional temperature gains across the north-central US, would have a direct impact on a key demand driver: heating load.

When winter temperatures rise above normal levels, residential and commercial heating demands decline measurably. This reduced consumption directly pressures natural gas prices downward, as fewer BTUs are needed to heat buildings. The link between weather and gas prices has historically been one of the most reliable market dynamics, making temperature forecasts critical for price direction.

US Production Continues Climbing Toward Record Highs

Supply-side pressures compounding the weather headwinds come from robust domestic production. The EIA had forecast 2025 US natural gas production at 107.74 bcf/day, representing a modest increase from November’s 107.70 bcf/day projection. More significantly, production remains near historic highs, with Lower-48 dry gas output recorded at 110.0 bcf/day—up 4.4% year-over-year according to BNEF data.

This production strength reflects sustained drilling activity. While the number of active US natural gas drilling rigs edged lower to 125 in early January—down from November’s 2.25-year high of 130—rig counts have recovered sharply from September 2024’s 4.5-year low of just 94 platforms. Higher production flows create natural downward pressure on prices, a bearish fundamental for investors.

Ample Storage and Modest Draw Data Weigh on Sentiment

Perhaps equally bearish as warm weather and production is the state of natural gas inventory. Weekly EIA reports showed that inventories declined by just 38 bcf for the week ended December 26, well below market consensus expectations of 51 bcf. More tellingly, this draw was far smaller than the 5-year seasonal average draw of 120 bcf per week, indicating that storage depletion is proceeding more slowly than historical norms.

As of December 26, gas inventories sat 1.1% below year-ago levels but crucially 1.7% above 5-year seasonal averages—signaling ample supplies heading into the heart of winter. European storage mirrored this surplus dynamic, with facilities at 62% full as of December 31, compared to the 5-year average of 74% for the same period. This excess inventory acts as a persistent price ceiling, preventing sharp rallies.

Demand Resilience Provides Modest Support

A countervailing factor emerged from electricity generation data. The Edison Electric Institute reported that US Lower-48 electricity output for the week ended December 6 rose 2.3% year-over-year to 85,330 GWh, with the 52-week output climbing 2.84% year-over-year to 4,291,665 GWh. Since natural gas-fired plants comprise a significant portion of US power generation, stronger electricity demand does provide some support to gas markets.

Meanwhile, LNG export activity continued steadily, with net flows to US export terminals averaging 19.6 bcf/day in the period reviewed—up 1.9% week-over-week. This ongoing export demand prevents inventories from building to extreme levels, though export growth remains modest relative to broader supply dynamics.

The Convergence of Bearish Forces

The convergence of warm weather forecasts, record-high production, and surplus storage creates a multifaceted headwind for natural gas prices. While occasional upside can emerge from electricity demand strength and export activity, the structural forces pressing natural gas down remain substantial. Until production moderates significantly or weather reverts to below-normal levels, downward price pressure on natural gas appears likely to persist.