Overall, the U.S. Energy Information Administration reports this month that natural gas prices are up significantly for the year, but so are inventories.

This from the EIA:

  • U.S. natural gas stockpiles are up 28 billion cubic feet, lower than the 36 billion cubic feet than outlooks provided by energy analysts.
  • Natural gas futures prices were down to $2.77 per thousand cubic feet last week, before rising to $2.81 on Sept. 11, 2012.
  • Natural gas inventories are 13% higher in 2012 than in 2011, and about 11% greater than its five-year average.
  • The EIA says natural gas futures prices are up 45% from April 2012, when the commodity was trading at about $1.90 per thousand cubic feet.

Despite the relatively upbeat news, energy producers specializing in natural gas saw a mixed bag in stock prices last week. Exxon was up 2.7% the week before the EIA report, and EOG Resources was up 2.3%. But natural gas giant Chesapeake Energy saw its stock drop by a point.

Both major natural gas funds increased last week. The U.S. Natural Gas Fund was up 0.8% and the Market Vectors Oil Services ETF increased 2.6%.

Against that backdrop, a new report from New York City-based PIRA Energy Group, an analytical and consulting firm, says that the natural gas market has a unique niche opportunity for investors: the U.S. transportation fuel market.

The report addresses both medium- and longer-term scenarios for the transport energy market and takes aim at pegging the direction of natural gas prices, which analysts say should remain low for the next 10 years.

“The sheer volume of U.S. recoverable gas resources relative to expected demand suggests that benchmark Henry Hub gas prices will remain deeply discounted relative to oil prices beyond this decade. Furthermore, the lengthy period of low-cost gas relative to oil has tremendously broadened support for the view that inexpensive North American gas is here to stay.”

But it’s the transportation sector that should really leverage decade-long low natural gas prices, PIRA says. In particular, future fuel demand for natural gas vehicles (NGV) and liquefied natural gas vehicles (LNG) has enormous upside potential, led by private-sector initiatives with or without federal government assistance.

In comments to Oil and Gas Investor, PIRA associate director Nina Fahy says that the break in natural gas prices is in direct correlation to higher oil prices. “The increase in natural gas use in transportation is driven by the acceptance of the view that gas prices will remain discounted relative to oil due to the magnitude of recoverable gas resources versus expected demand,” she says.

The transition from oil to natural gas by the transportation industry is no fly-by-night proposition. “Given the necessary investments to move forward with adopting natural gas as a transportation fuel, in terms of infrastructure and vehicle manufacturing, this would be a permanent transition — not temporary,” she said.

Investors might want to direct their focus on natural gas companies for the long term, especially certain segments of that industry.

“The energy companies that would benefit from the move to compressed natural gas and LNG would be producers with production profiles heavily weighted toward gas since a wholly new base of demand for their end-product would be created,” Fahy said. “Outside of these gas-focused producers, those with significant presence in both gas and marketing would stand to benefit.”

Natural gas vehicles stand to gain the most traction in this environment, the report states. The report also wonders if the NGV market can meet burgeoning demand.

“Adoption of natural gas into both U.S. commercial trucking and all varieties of fleets — vehicle groups generally operated by corporations and government agencies — is approaching a critical threshold, which ultimately could lead to enormous gas demand growth at the expense of diesel fuel.”

Also from the report:

  • For starters, the market needs to build a consumer base for trucks that are not yet built, and that also lack a viable fueling infrastructure.
  • Natural gas marketers must sell truckers on the notion that purchasing an LNG truck can be a relatively safe and fast payback investment. Relative to other estimates, PIRA’s economic analysis suggests that payback periods for heavy-duty vehicles typically should range from one to two years.
  • Producers of NGV and LNG heavy-duty vehicles also deserve a long look by investors.
  • The PIRA paper states that the building of such vehicles, especially LNG trucks, is a “pivotal building block” for the natural gas/transport market, but that companies like Cummins and Westport have a good head start.
  • Currently available LNG truck-engine options are extremely restrictive, in particular a lack of medium-size engines that can compete effectively with diesel engines. But the Cummins/Westport Innovations joint venture is scheduled to make available a potentially ground-breaking 11.9 liter LNG engine in early 2013, and the implied payback period associated with this midsize LNG truck appears likely to generate high consumer interest.
  • There’s little doubt that the natural gas industry is not only reshaping the U.S. energy landscape. It’s also transforming – albeit in the early stages – the U.S. trucking and transportation market.
  • As the PIRA report attests, that transformation has already started and is bringing with it opportunities for energy investors that did not exist five or 10 years ago.