Natural gas, which until now has been considered a local commodity, will be increasingly linked to the global market over the next decade, according to an analyst research report released by Wachovia Capital Markets LLC.

“Early signs are already there. Henry Hub may be +$8, but when prices enter the double digits in Europe, the [liquefied natural gas] ships stay on that side of the ocean,” wrote Wachovia analysts Samuel Brothwell and Angela Ho in their 40-plus page report, “Outsource This.”

They expect LNG imports to lower gas prices in the United States, but only to a “point of equilibrium with world markets.” The analysts predict a “$5-6 base is likely” in the years ahead.

“We believe that falling domestic supply trends may briefly reverse as high prices, advanced technology and a record rig count coax new gas from the ground,” lessening the demand for imported LNG in the short term. “But those incremental molecules will come at a very high marginal cost that ultimately won’t be able to compete with cheaper imports as LNG capacity into the U.S. grows post-2008,” they said.

“Marginal, high-cost U.S. natural gas production will likely be displaced” by LNG imports, Brothwell and Ho noted. Comparatively, “LNG will be a lower-cost resource…and will diminish drilling of marginal wells that have contributed to very high incremental finding, development and production costs.”

LNG currently has a “small share” of the U.S. market, but it could grow to 10-15% of supply within the next five to 10 years, according to the Wachovia analysts. They noted that regasification capacity, currently at only about 2 Bcf/d, should easily grow to 10 Bcf/d or more as existing terminals are expanded and new ones already under construction are completed later this decade.

“As LNG takes a bigger share of the U.S. market, the global price of natural gas will have greater bearing; this could better align U.S. prices with the global market, but it may also wind up increasing volatility, particularly in peak winter months,” the analysts said.

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