How Natural Gas Prices Could Spike Over the Long Term

Natural gas prices in the U.S. are lower than those in the rest of the world. Two scenarios could cause natural gas prices to rise significantly over the long term.

Apr 21, 2014 at 11:30AM

The future is generally not set in stone. Thousands of factors affect natural gas prices, and each factor can change at any moment. So far, these factors have kept U.S. natural gas trading at a significant discount to prices in the rest of the world. Natural gas contracts at Henry Hub, for example, trade at around $4.7/MMBtu while LNG trades at approximately $20/MMBtu in the Asian Pacific. 

What factors could cause U.S. natural gas prices to rise to global levels?

The political scenario
At the present moment, there are 31 LNG export terminal applications at the DOE. The sum total of the 31 LNG export terminal applications' exporting capacities amounts to approximately half of current U.S. natural gas consumption. If all 31 LNG export terminal applications received approval, natural gas prices would likely increase significantly. 

So far, only seven of those applications have been approved. The remaining applications have not been approved because the current administration is concerned that higher domestic natural gas prices will hurt manufacturing and other sectors of the economy.

In the short term, it is uncertain whether the present administration will have a change of heart. In the long term, it is more certain that a politician who is amenable to LNG export terminals will come into power.

The economic scenario
The current administration is also hesitant on granting LNG export terminal licenses because the macro economy has not reached escape velocity. Manufacturing is very important to the U.S. economy -- it represents approximately 13% of GDP -- and many other industries depend on it. What happens to manufacturing often translates into what happens to the broader economy. If manufacturing softened because natural gas prices increased, the broader U.S. economy would soften as well. The broader economy softening at this point in the economic cycle might endanger the economic recovery. 

If the U.S. economy reached escape velocity and heated up significantly, however, that economic calculus might change. Giving the go-ahead to build LNG export terminals would suddenly become a good way to prevent the economy from overheating. If that were to happen, more LNG export terminals would likely receive consideration and natural gas prices would rise. 

The bottom line
Higher natural gas prices would bode well for companies that sit on quality natural gas assets, such as Chesapeake Energy (NYSE:CHK), Range Resources (NYSE:RRC), and EQT Corp. (NYSE:EQT). If natural gas prices were to rise, the value of these companies' assets would be worth far more and they would be far more profitable. Their share prices would likely rally significantly as well. For the natural gas companies' shareholders, the unapproved LNG export terminals represent significant upside.

In the short term, a higher natural gas price remains just a scenario. Many industry participants still think that natural gas prices will remain range-bound. If there are any indications of the economy overheating or political winds changing, however, that scenario may become a reality.

How can you profit from higher gas prices?
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Jay Yao has no position in any stocks mentioned. The Motley Fool recommends Range Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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