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How Natural Gas Prices Could Spike Over the Long Term

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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.

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Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 21, 2014, at 1:06 PM, fuzzface52 wrote:

    Let see we have rising oil prices, rising diesel prices and rising gasoline prices at a time when we have more supply than we have ever had. So the Greedy S.O.B's on Wall Street are now eyeing UNG again. Can a ordinary person just get a break from all this greed. Maybe we need to do in this country what they are doing in other parts of the world holding their Govt's accountable and Revolt against them when they are not! Our Govt. should be held accountable for these Run away commodity prices because it our politicians that will not reform the SEC laws that would take out the loop holes for these trades in the first place! Revolution is not a bad thing every now and then and we are RIPE for one soon!

  • Report this Comment On April 21, 2014, at 2:07 PM, sporttster wrote:

    Totally agree, Fuzz. These guys are dreaming of more and more $$ in their own pockets while screwing the US consumer. Need to write our reps and say the first one that starts voting for these terminals to start exporting will be the first person voted OUT of office! We are completely serious about this. We're being hit everywhere due to greed and we're going to start hitting back! Sick of this nonsense....

  • Report this Comment On April 21, 2014, at 2:49 PM, rickshelton53 wrote:

    Why doesn't it read, Natural Gas Prices ''WILL''Spike Over the Long Term..

  • Report this Comment On April 21, 2014, at 2:51 PM, rickshelton53 wrote:

    Nothing is true this is false it will raise very soon no matter what these parasites make it appear to be

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Jay Yao

Jay is an energy and materials writer. He reports on oil and gas fundamentals and macro trends in the industry.

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