Natural Gas Bounces Back as Oversold Conditions Trigger Shorts to Cover

The Setup: What Just Happened

January Nymex natural gas (NGF26) closed up +1.94% on Friday, reclaiming ground from a 7-week low as technical oversold conditions forced short covering across the futures market. This bounce matters because nat-gas has been in freefall since hitting a 3-year peak on December 5, dragging prices down as warmer weather killed heating demand and allowed storage levels to rebuild.

Why the Rally Fizzled Initially

Friday started bearish. Atmospheric G2’s forecast painted a warmer December 24-28 across the US with above-normal temps stretching into early January, signaling continued weakness in heating load. But here’s the kicker: that oversold setup was too juicy to ignore. Technical traders covering short positions pushed prices sharply higher by day’s end.

The Fundamental Headwinds Remain Heavy

Production keeps climbing. The EIA bumped its 2025 US natural gas production forecast to 107.74 bcf/day (up from 107.70 bcf/day in November), keeping the supply narrative bearish. Lower-48 dry gas production hit 1,123.9 bcf/day on Friday—up 8.8% year-over-year. Active nat-gas rigs stand at 127, just shy of the 2.25-year high of 130 set on November 28.

Meanwhile, demand is tepid. Lower-48 state gas demand came in at 98.7 bcf/day, down 1.0% y/y. LNG export flows to US terminals checked in at 17.6 bcf/day, down 2.7% week-over-week.

Storage Tells the Real Story

EIA’s Thursday report showed nat-gas inventories fell 167 bcf for the week ending December 12—smaller than the consensus draw of 176 bcf and more than double the 5-year weekly average of 96 bcf. Translation: the drawdown is accelerating, but storage levels remain adequate. Inventories are down 1.2% year-over-year but still 0.9% above their 5-year seasonal average. European gas storage is sitting at 68% full versus a 78% five-year seasonal average, signaling no crisis brewing.

The Electricity Tailwind

One bright spot: US electricity output in the week ended December 6 climbed 2.3% y/y to 85,330 GWh, with the 52-week output up 2.84% y/y to 4.29 million GWh. More power generation could support gas-fired generation, providing a subtle floor for nat-gas demand.

The Bottom Line

Friday’s bounce was purely technical—shorts covering an oversold position. The fundamentals (rising supply, mild weather, ample storage) remain structurally bearish for prices. Watch whether this bounce holds or if the downtrend resumes.