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Dallas Fed: Manufacturing Recovery, LNG Mean Higher Prices

Longer term, analysts at the Federal Reserve Bank of Dallas predict "much higher natural gas prices," despite a "sizable" inventory of undeveloped domestic resources.

The analysts look to a recovery in the U.S. manufacturing sector for significant gas price support as well as eventual increased reliance on liquefied natural gas (LNG). "Once LNG imports become the marginal source of U.S. supply, much higher international natural gas prices should prevail," wrote Stephen P. Brown and Raghav Virmani in a second quarter energy update.

"Weak manufacturing activity, the development of domestic natural gas resources and slightly elevated natural gas inventories account for the weakness in U.S. natural gas prices [currently]," they wrote, noting that inventories, while near the five-year average, are still high on a historical basis as inventories have been elevated during the same period for several consecutive years.

Domestic end-users might take little comfort in the fact that U.S. gas prices are well below international prices for LNG as the liquefied fuel is selling for $18-19/Mcf, or nearly twice Henry Hub prices. Chesapeake Energy CEO and domestic gas cheerleader Aubrey McClendon has quipped in the past that the U.S. needs LNG liquefaction rather than gasification terminals, but that's not much of a joke these days.

"Because the United States does not have the facilities to export natural gas to the world market [save for one terminal in Alaska], 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," wrote the Dallas Fed analysts.

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