A colder winter will drive the average price of natural gas to $3.38 per million British thermal units (MMBtu) in January, the U.S. Energy Information Administration (EIA) forecasts.

The EIA’s newly released Short-Term Energy and Winter Fuels Outlook expects the average price of gas to soar from $1.92/MMBtu in September on rising domestic demand and increased demand for LNG exports, as well as reduced production. Even with inventories expected to reach a record 4 trillion cubic feet (Tcf) by the end of October, higher withdrawals than the five-year average will drag that total to 1.7 Tcf, 6% below the average for 2016-2020.

“Prices can be really volatile is the market is caught off-guard,” Ed Morse, global head of commodities research at Citi Research, said during an Oct. 7 webinar discussing the outlook. “We’ve had a very unusual year with natural gas. We had an extremely mild northern hemisphere winter last winter. We had inventory levels at the end of the heating season at abnormally high levels across the planet.”

Read: US Crude Oil Production to Fall Less in 2020 Than Previously Forecast

EIA acknowledged that its October outlook was subject to uncertainty because responding to the COVID-19 pandemic has led to evolving mitigation and reopening efforts.

“Reduced economic activity related to the COVID-19 pandemic has caused changes in energy demand and supply patterns in 2020 and will continue to affect these patterns in the future,” EIA said. The outlook assumes U.S. gross domestic product (GDP) declined by 4.4% in the first half of 2020 compared to that period in 2019. It also assumes that GDP will rise in third-quarter 2020 and grow 3.5% year-over-year in 2021.

La Niña Sticking Around

The National Oceanographic and Atmospheric Administration (NOAA) estimates a 75% chance that La Niña conditions present in the Pacific during the summer will stay through the winter. The impact so far has been a reduction in wind shear, which is the contrast in winds between the surface and upper levels of the atmosphere. That has resulted in a very busy Atlantic hurricane season.

Looking ahead, La Niña winters in the southern U.S. tend to be warmer and drier. The northern part of the country and Canada can expect lower-than-normal temperatures. NOAA predicts above-average snowfall in Montana, Wyoming, the Midwest and northern Colorado.

“For us, this is actually fairly unusual,” Mike Halpert, deputy director of the NOAA’s climate prediction center, said during the webinar. “We don’t really favor below average temperatures very often. It’s not that it doesn’t happen, it’s just that it’s very, very challenging to know when it’s going to.”

Increased energy consumption to meet higher space heating demand will push up spending by 6% on natural gas, 7% on electricity and 14% on propane compared with winter 2019-2020. Part of this is due to more people working and attending school at home because of the pandemic.

Consumption, Production Declines

EIA sees a 1.8% drop in U.S. consumption of natural gas in 2020. It attributes the drop to lower residential and commercial heating demand in the early part of the year, leading to average usage of 13.1 billion cubic feet per day (Bcf/d). Reduced industrial consumption tied to the economic slowdown will likely drop the 2020 average by 0.8 Bcf/d to 22.3 Bcf/d. Total consumption in 2021 is expected to experience a 5.9% decline from this year as EIA expects rising gas prices to reduce demand in the electric power sector.

U.S. dry natural gas production is forecast to average 90.6 Bcf/d in 2020, down from 93.1 Bcf/d in 2019. The 2021 expectation is 86.8 Bcf/d, although EIA predicts production will start to rise in the second quarter as natural gas and crude oil prices increase.

“We have supply down in Appalachia,” Morse said. “We have supply down in the gas-producing areas of the Southwest. We have supply down with associated gas because production of oil is down.

“We’re in a period of a demand rebound and supply is quite limited.”

LNG exports, which rose to 4.9 Bcf/d in September from 3.7 Bcf/d in August, will return to pre-COVID levels by November, EIA forecasts, and average more than 9 Bcf/d from December through February.

Morse noted how U.S. weather can drive global natural gas markets. For example, a 10% colder U.S. winter could lift the base price of gas from $3.40/MMBtu to $3.90/MMBtu. In that scenario, the European price would jump to $7.10/MMBtu from $4.60/MMBtu and Asia’s Japan Korea Mark price for LNG would rise to $7.40/MMBtu from $4.90/MMBtu.

LNG exports, which rose to 4.9 Bcf/d in September from 3.7 Bcf/d in August, will return to pre-COVID levels by November, EIA forecasts, and average more than 9 Bcf/d from December through February.