Natural gas is starting to resemble oil as a global commodity – here's why that matters and how to play it

Published Wed, Jul 3 20246:54 AM EDTUpdated Wed, Jul 3 20248:20 AM EDT

Natural gas could become the global energy source of the future, serving as a transition fuel to replace coal and support renewables as rising demand makes it easier to ship around the world. Natural gas has historically been a regional commodity, with supply limited by pipeline networks. But a global market has developed as the ports and terminals to liquefy gas expands, according to Shehriyar Antia , head of thematic research at asset manager PGIM, the asset management arm of Prudential Financial. "Natural gas is starting to resemble oil in that there's a more global market emerging for it," Antia told CNBC in an interview. "There are smaller differentials in regional prices ... because increasingly it is becoming easier to ship it around the world." While natural gas still is not on par with oil in global reach and significance, "in the last 10 years it has taken tremendous, tremendous steps in that direction," Antia said. Over the past decade, the volume of global liquefied natural gas traded nearly doubled to 401 million metric tons in 2023 from 236 million metric tons in 2013 , connecting 20 export markets with 51 import markets, according to the International Gas Union . The global capacity to liquefy natural gas has grown 60% since 2014, reaching 483 million metric tons annually as of February 2024, according to the IGU. The widespread ability to cool gas into a liquid is the key innovation that has made it possible to ship the commodity across the world's oceans on a commercial scale. Cheniere: LNG powerhouse The U.S. dominates the global LNG market, accounting for 21% of global exports last year and shipping 84 million metric tons, according to the IGU. Cheniere Energy , a global LNG leader based in Houston, is an opportunity for investors who want exposure to the growing global gas market, Antia said. "When it comes to LNG infrastructure, Cheniere is a company that provides the infrastructure necessary to liquefy as well as re-gasifying natural gas," Antia said. "They're a big part of the shipping internationally of natural gas." Cheniere's New York Stock Exchange ticker symbol? LNG, of course. LNG 3M mountain Cheniere Cheniere makes up half of U.S. natural gas export capacity, with 45 million metric tons per year of liquefaction capacity at two sites on the Gulf of Mexico, according to a June research note from Bernstein. Cheniere would be the fourth-largest LNG exporter in the world, just behind Indonesia, if counted separately from the rest of the U.S. industry, the analysts said. Bernstein has an outperform investment opinion on Cheniere, with a price target of $217 per share, implying 24% upside from Tuesday's close of $174.45. Morgan Stanley is also bullish, arguing Cheniere has a structural advantage over smaller U.S. peers. The investment bank has a price target of $191 per share, suggesting a 9% upside. A 'transition fuel' Demand for natural gas is soaring as economies including China and India move to replace coal as an energy source for electricity generation, Antia said. As demand rises, the world's capacity to liquefy natural gas is expected to increase 43% to 700 million metric tons a year by 2030, according to the IGU. China was the largest LNG importer in 2023, taking 71 million metric tons, followed by Japan, South Korea and India. Whether LNG is actually a cleaner-burning fossil fuel with a role to play in the energy transition to renewables is contentious. The U.S. Department of Energy found in 2019 that LNG exported to Europe would generate anywhere from 56% less greenhouse gas emissions than coal to 1% more emissions than coal over a 20-year period. In Asia, LNG exports would generate 2% to 53% fewer greenhouse gas emissions than coal, according to the DOE study. The Biden administration in January paused the approval of new LNG exports to countries without free trade agreements with the U.S. in order to evaluate the climate impact, among other issues. The move was cheered by environmentalists and opposed by the gas industry. A federal judge on Monday blocked the administration from continuing the pause. But fossil fuels are not going to be easily replaced, Antia contended. Solar and wind are growing rapidly but they are still not easily dispatchable, or able to be turned on and off as needed, the analyst said. Gas is a natural "transition fuel" that can complement renewables by dispatching energy when solar and wind can't, he said. "Where natural gas can make a really huge impact in this energy transition is in places where it can displace higher carbon emitting sources such as coal," Antia said. "Embracing the greener end of fossil fuels is a really smart, nuanced way of bringing the energy transition forward." Crucial for energy security LNG has also become a crucial commodity for national security, particularly since Europe halted most gas imports from Russia after Moscow invaded Ukraine in February 2022. Europe suddenly lost about 40% of its gas supply after the war broke out, according to Morgan Stanley research published last week. The U.S. is the largest LNG provider for its allies in the European Union and the United Kingdom since the war began, representing 48% of their total imports in 2023, according to data from the U.S. Department of Energy. When counted as a single market, the 27-member European Union far surpasses China as the largest LNG importer, taking 121 million metric tons in 2023, according to the IGU. "Our friends and allies have come to depend on the U.S. for that supply," Mark Menezes, CEO of the United States Energy Association, told CNBC's " Squawk Box Europe " in an interview Tuesday. "As we go through the energy transition and natural gas continues to be the driver to take the place of coal to take the place of Russian gas in Europe, policies need to continue to be in place to allow that to happen," said Menezes, deputy secretary of Energy in the Trump administration. LNG prices surged after the Russian invasion as global supplies suddenly tightened. Those high prices sparked investments in more than 150 million metric tons per year of LNG capacity, which will significantly expand supply, according to Morgan Stanley. "This is significant supply growth," the analysts told clients in the June note. "As we have written over the last few quarters, we expect this additional supply to push the market back into balance, and ultimately oversupply over the next few years."