Natural Gas Futures Rally as Oversold Conditions Trigger Covering Activity

January Nymex natural gas futures experienced a notable recovery on Friday, closing +0.076 (+1.94%) as technical oversold conditions prompted short covering in the market. The contract had tumbled to a 7-week low earlier in the session before finding support, signaling a potential shift in momentum after weeks of downward pressure since early December’s 3-year peak.

Supply Pressures Continue to Weigh on Sentiment

The underlying fundamental picture remains decidedly bearish. US dry gas production in the Lower-48 states reached 1,123.9 bcf/day on Friday (+8.8% year-over-year), according to BNEF data, marking production levels near historic highs. The EIA reinforced this bearish outlook by raising its 2025 US natural gas production forecast to 107.74 bcf/day, a modest increase from November’s 107.70 bcf/day estimate, underscoring the market’s structural oversupply environment.

Active US natural gas drilling rigs remain elevated at 127 for the week ending December 19—just shy of the 2.25-year high of 130 set in late November. This elevated rig count reflects producers’ confidence in near-term economics despite weak prices, further pressuring the outlook for sustained price recovery.

Weather and Demand Dynamics Shift Lower

Above-normal temperatures across most of the US through early January continue to suppress heating demand, a critical headwind during the typically strong winter withdrawal season. Lower-48 state gas demand clocked in at 98.7 bcf/day on Friday (down 1.0% year-over-year), reflecting the mild weather impact. Atmospheric G2 forecasters indicated that above-normal temperature patterns are expected to persist through early January, limiting near-term demand growth.

LNG export flows also remain constrained, with net flows to US LNG export terminals estimated at 17.6 bcf/day (down 2.7% week-over-week), adding to the overall demand headwind.

Storage Signals Adequate Supply but Questions Remain

Thursday’s EIA inventory report provided a slightly mixed signal. Natural gas inventories for the week ended December 12 declined by 167 bcf—below the market consensus of 176 bcf but larger than the 5-year weekly average decline of 96 bcf. As of mid-December, inventories stood 1.2% below year-ago levels but remained 0.9% above their 5-year seasonal average, confirming adequate supply conditions that have suppressed prices throughout the selloff from December’s highs.

Technical Setup Presents Short Squeeze Opportunity

Friday’s short covering rally highlights the technical extremes reached after the weeks-long decline. While fundamental headwinds—robust production, warm weather, and ample storage—remain in place, the severity of the oversold condition created a tactical opportunity. Traders who accumulated short positions during September through recent months may have triggered covering, providing temporary relief to prices.

The critical question for natural gas bulls is whether this bounce represents a genuine reversal or merely a technical exhale before further weakness. With production near records, storage rebuilding, and above-normal temperatures extending into 2025, the structural case for higher prices remains challenged despite the tactical short-covering bounce on Friday.