Dallas Fed Reserve Predicts Higher Future Natural Gas Prices

U.S. natural gas prices are poised to head higher over the long term when commercial demand increases, according to a report by the Federal Reserve Bank of Dallas.

"Higher oil prices, several cold spells, seasonal gains in demand, reduced inventories and expectations of increasing natural gas use to generate electricity are continuing to push prices upward," the bank said in its first-quarter energy report.

Nonetheless, domestic prices are still depressed compared with the fast-rising prices commanded on the international market for liquefied natural gas, selling for between $18 and $19 per million cubic feet, about twice the domestic Henry Hub price.

"The only avenue for arbitrage of natural gas prices between the U.S. and the rest of the world is a sharp reduction in LNG imports," the report said.

But in the long term, the report suggests that as U.S. manufacturing activity improves as the effects of the economic downturn fade, higher prices for domestic supplies are in the cards.

"Much higher natural gas prices seem likely even though U.S. producers are thought to be sitting on sizable supplies of undeveloped resources," the bank said. "A recovery in U.S. manufacturing should sharply boost natural gas demand. Once LNG imports become the marginal source of U.S. supply, much higher international natural gas prices should prevail."