Natural Gas Market Faces Supply Glut as LNG Export Constraints Build Inventory

The natural gas market is grappling with abundant supply conditions that continue to pressure prices. February Nymex natural gas futures closed down 0.80% on Friday, though prices managed to stay above Thursday’s 3-month lows. The primary driver remains excess US supply: the latest EIA weekly report revealed that natural gas storage levels are running 3.4% above their 5-year seasonal average, signaling a significant inventory buildup that weighs on price strength.

The supply-demand balance reflects a complex market picture, with supportive factors competing against the overwhelming downward pressure from oversupply. Weather forecasts offered some relief, as the Commodity Weather Group projected below-normal temperatures across much of the northern US and East for January 21-30, which could boost heating demand for natural gas. However, these gains remain limited by the structural surplus.

LNG Export Capacity Constraints Worsen the Supply Glut

A critical factor amplifying the natural gas supply problem stems from operational issues at major export terminals. Both Cheniere’s Corpus Christi LNG export facility and the Freeport LNG export terminals along the Texas Gulf Coast experienced reduced feedgas flows this week due to electrical and piping issues. These capacity constraints are particularly significant because reduced LNG export activity allows natural gas to accumulate in domestic storage rather than finding outlets to international markets. The week ended January 9 saw natural gas inventories decline by only 71 bcf—substantially below the market consensus of 91 bcf and far below the 5-year weekly average draw of 146 bcf, further confirming the storage buildup.

As of January 9, natural gas inventories were up 2.2% year-over-year and remained 3.4% above seasonal norms. By January 13, European gas storage stood at just 52% capacity, compared to the 5-year seasonal average of 68% for this period, indicating that international demand for LNG may not provide sufficient outlet for excess US supply.

Electricity Demand and Production Dynamics Add Mixed Signals

On the demand side, US electricity output in the week ended January 10 fell 13.15% year-over-year to 79,189 GWh, according to the Edison Electric Institute. This decline in power generation suggests reduced immediate natural gas burn for electricity production. However, the broader 52-week picture shows US electricity output rose 2.5% year-over-year to 4,294,613 GWh, indicating longer-term demand resilience.

Natural gas production remains elevated. According to BNEF data, US (lower-48) dry gas production on Friday reached 113.0 bcf/day, up 8.7% year-over-year, despite recent production challenges. Lower-48 state gas demand on Friday totaled 104.9 bcf/day, down 2.4% year-over-year, showing demand softness. Estimated LNG net flows to US export terminals on Friday were 19.8 bcf/day, up 2.5% week-over-week, though still constrained by the facility issues noted above.

Production Outlook and Drilling Activity Suggest Future Easing

The US natural gas production picture offers some price support. The EIA reduced its 2026 US dry natural gas production forecast to 107.4 bcf/day from the previous month’s estimate of 109.11 bcf/day, signaling expectations for moderating output growth. Current US natural gas production levels remain near record highs, with active US natural gas drilling rigs recently posting a 2-year high. However, Baker Hughes reported that active US natural gas drilling rigs fell by 2 to 122 in the week ending January 16, moving further below the 2.25-year high of 130 rigs set on November 28. Over the past year, gas rig counts have recovered from the 4.5-year low of 94 rigs in September 2024, but the recent decline suggests the production growth trajectory may be moderating.

The natural gas market remains in a precarious balance between structural oversupply and limited supportive factors. Until either export capacity normalizes or domestic demand strengthens materially, the abundant natural gas supply conditions will likely continue to cap price recovery efforts in the near term.