U.S. natural gas futures plunged about 8% to a 21-month low on Jan. 26 on forecasts for less cold weather and lower heating demand next week than previously expected and a growing belief in the market that Freeport LNG's export plant in Texas will not actually restart until March or later.

That price plunge also came ahead of a federal report expected to show last week's storage withdrawal was much smaller than usual because the weather then was warmer than normal, keeping heating demand low.

The price more also occurred the day before the expiration of the February contract as the front-month on the New York Mercantile Exchange when volatility often peaks because trading volumes are low. In 2022, gas prices soared by a record 46% when the February contract expired before plunging 26% the next day when the March contract became the front-month.

Analysts forecast U.S. utilities pulled just 82 Bcf of gas from storage during the week ended Jan. 20. That compares with a decrease of 217 Bcf in the same week last year and a five-year (2018 to 2022) average decline of 185 Bcf.

If correct, last week's decrease would cut stockpiles to 2.738 Tcf, or 5.3% above the five-year average of 2.601 Tcf for this time of year.

Freeport LNG update

Earlier this week, Freeport said its export plant was ready to begin the process of exiting a seven-month outage, pending regulatory approval. But several analysts have stuck with their earlier estimates that it will take until March or later for the plant to actually start pulling in big amounts of gas from pipelines.

Freeport, the second-biggest U.S. LNG exporter, is important because the market expects gas prices and demand to rise once the plant returns. The facility, which shut in a fire on June 8, 2022, can pull in about 2.1 billion cubic feet per day (bcfd) of gas and turn it into LNG when operating at full power.

That is about 2% of what U.S. gas producers pull out of the ground each day.

Small amounts of pipeline gas started flowing to Freeport on Jan. 26, according to Refinitiv data. Officials at Freeport had no comment on what they were using the gas for. The last two times gas flowed to Freeport from Jan. 14-18 and Dec. 20-28, sources said the company used the gas to maintain a flare system.

Volatility pummels market

On its second to last day as the front-month, gas futures  for February delivery fell 24 cents, or 7.8%, to $2.827 per MMBtu at 9:20 a.m. EST (1420 GMT), putting the contract on track for its lowest close since April 2021.

That continues the record volatility seen last year, with the contract now on track to close up or down over 5% on 10 of the 17 trading days in 2023.

The March contract, which will soon be the front-month, was down about 20 cents to $2.71 per MMBtu.

Meanwhile, recent increases in crude futures to a nine-week high boosted oil's premium over gas to its highest since January 2020. Over the last several years that premium has prompted U.S. energy firms to focus drilling activity on finding more oil instead of gas.

The oil-to-gas ratio, or level at which oil trades compared with gas, jumped to 29-to-1 on Jan. 26. So far in 2023, crude has traded about 22 times over gas, much higher than crude's average premium of 15 times gas in 2022 and a five-year average (2018-2022) of 20 times. On an energy equivalent basis, oil should trade only six times over gas.