Natural Gas Rebounds Sharply as Market Anticipates Major Inventory Drawdown

Natural gas futures experienced a notable rebound on Wednesday, with January Nymex natural gas (NGF26) climbing +0.021 or +0.46%. After sliding to its lowest point in two weeks, the commodity recovered as traders shifted focus to upcoming supply data and broader market dynamics.

Storage Withdrawal Triggers Short Covering Rally

The primary catalyst for Wednesday’s upswing was anticipation of a substantial weekly inventory decline. Market participants are positioning for Thursday’s EIA report, which is widely expected to show a large storage withdrawal of approximately -170 bcf for the week ending December 5. This drawdown would significantly exceed the historical five-year average of -89 bcf for the comparable week, signaling tighter near-term supply conditions and prompting short covering activity across the futures complex.

Weather Forecast Creates Headwind

Despite the bullish inventory narrative, natural gas faced initial selling pressure from weather forecasts. Atmospheric G2 predicted warmer temperatures spreading across the eastern and southern United States from December 20-24, a development that would suppress heating demand and weigh on prices. This warmer outlook triggered substantial liquidation in futures positions as traders reassessed demand fundamentals.

Production Growth Adds Bearish Pressure

On the supply side, headwinds continue to build. The EIA revised its 2025 production forecast upward to 107.74 bcf/day from November’s 107.70 bcf/day estimate. Current US natural gas output remains near record highs, supported by active drilling activity—gas rigs recently touched a two-year peak, indicating industry confidence in continued output expansion despite price pressures.

Mixed Signals from Demand and Infrastructure Data

Current operational metrics present a nuanced picture. Lower-48 dry gas production reached 111.9 bcf/day on Wednesday (+7.8% year-over-year), while regional demand totaled 106.2 bcf/day (+12.0% year-over-year), according to BNEF data. LNG export activity showed estimated net flows of 18.3 bcf/day (+1.9% week-over-week) to US terminals.

Electricity generation provided some support, with the Edison Electric Institute reporting that US electricity output in the week ending December 6 rose +2.3% year-over-year to 85,330 gigawatt hours, and cumulative 52-week output climbed +2.84% year-over-year to 4,291,665 gigawatt hours.

Storage Levels Signal Adequate Supply

The most recent inventory data, through November 28, painted a cautious picture. Nat-gas inventories for that week declined by only -12 bcf, undershooting the consensus expectation of -18 bcf and falling short of the five-year average drawdown of -43 bcf. As of late November, stockpiles were down just -0.4% year-over-year but remained +5.1% above their five-year seasonal norm, suggesting adequate supplies remain available. Internationally, European gas storage sat at 72% capacity, lagging the five-year seasonal average of 82% for this time of year.

Drilling Activity Remains Elevated

Baker Hughes data revealed that active US natural gas drilling rigs totaled 129 in the week ending December 5, down just one unit from the previous count but hovering near the 2.25-year high of 130 rigs established on November 28. The year-over-year comparison remains striking—gas rigs have surged from their 4.5-year low of 94 rigs in September 2024, demonstrating sustained industry focus on production growth despite volatile price conditions.

Market Outlook

Natural gas traders face competing narratives heading into Thursday’s large storage withdrawal announcement. While the expected substantial inventory decline offers near-term support, rising production forecasts, weather warming, and adequate supply levels create meaningful headwinds for any sustained rally.