The U.S. is seeing frigid temperatures this week, with a high chance of certain parts of the country experiencing deep freeze conditions.

This anomalous event will have profound effects on both supply and demand of natural gas. Last week, Henry Hub prices were highly volatile, with the contract for February delivery ending the week up 14.5% at $3.31 per million British thermal units (MMBtu), providing excitement among market participants after a tepid 2023. Most of the volatility was concentrated in the front of the futures curve, specifically the February 2024 contract, as market participants optimized expectations for short-term balances.

Indicative of an undersupplied market, the move saw backwardation, with the prompt month (February) and M+2 (March) widening by 156% from -$0.27 per MMBtu on Jan. 5 to -$0.70 per MMBtu on Jan. 12 as short-term market expectations continued to decouple from medium-term fundamentals.Conversely, Henry Hub prices barely reacted to last Thursday’s storage number, which showed above-average withdrawals of 140 billion cubic feet (Bcf) for the week ending Jan. 5.

On a forward basis, markets will continue to be extremely volatile for the rest of the month, especially next week when short-term weather models indicate elevated gas demand for heating and the potential for freeze-offs impacting production in major regions such as the Permian, Rockies and Appalachia.Last Friday, Jan. 12, provided a glimpse of extreme volatility, with cash prices trading as high as $13 per MMBtu, a function of a potential domestic gas market imbalance but also partially due to the fact markets are closed today for a public holiday.

Prompt-month Henry Hub prices correlate directly with the latest weather model runs, most notably the European Centre for Medium-Range Weather Forecasts (ECMWF).

Last week saw a significant surge, +20 heating degree days (HDDs) for week three (ending Jan. 18) vs the previous week, which induced market volatility.The latest 15-day weather model runs indicate bullish sentiment and increased price volatility for this week as estimates show temperatures will be at their lowest point this week on Tuesday and Wednesday, with heating degree days averaging 11-12 gas-weighted heating degree days (GWDDs) above the 30-year average.

Unusually high gas demand this week will be met with the possibility of freeze-offs in major producing regions such as the Permian, where minimum temperatures in Midland, Texas, are expected to hit lows of 13°F (-11°C) on Monday and 11°F (-12°C) on Tuesday.

Low temperatures will test the efficacy of natural gas equipment weatherization efforts (insulation, leak-sealing etc.) implemented following the impacts of Winter Storm Uri in February 2021. However, all regions remain susceptible to midstream/storage deliverability issues.

Storage serves as a buffer to production where there are constraints on natural gas processing plants and transportation, hence the stratospheric move in cash prices will trigger record withdrawals from storage this week.

Beyond the short-term market fluctuations, markets now have to price the remainder of the year, especially considering domestic gas markets are currently oversupplied.

During December 2023, when Rystad Energy analyzed 2024 balances, all metrics pointed towards bearish sentiment for 2024 Henry Hub prices, with the market oversupplied by 234 Bcf (-0.95 Bcfd year-on-year) and our expectations for winter end-of-season (EOS) storage at 1.952 trillion cubic feet (Tcf).

Dry gas production also averaged 104.4 Bcfd in 4Q23 (up 2.9% on 3Q23), with the forecast for 2024 growth at 2.1 Bcfd and a slow start to the winter heating season keeping 4Q23 residential/commercial demand muted.

If colder weather conditions materialize as forecast, January will shift the narrative. Freeze-offs will likely lower the production base for 2024, albeit for a short period, but the forecast for growth remains structurally unchanged.

This will also affect feedgas demand and knock-on effects on short-term LNG exports as freeze-offs tend to stress midstream operational efficiency.The most significant impact will be heating demand, as we expect January residential/commercial demand to be 18% higher, year-on-year.

As a result, preliminary 2024 balance estimates indicate a downward shift of 114 Bcf, with the market remaining oversupplied but with lower expectations for winter EOS at 1.838 Tcf.

This is further evidence that unpredictable factors such as weather can put a market on a new trajectory and alter price path dependency.

Ademiju Allen is a senior analyst for Rystad Energy