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Tickers in this Article: CVX, XOM, RDS.B, RDS.A, TOT, LNG
Although oil prices have rebounded nicely off their bottom, natural gas prices have lagged behind. One reason for this is that the market is concerned about a planned increase in capacity and imports of liquefied natural gas (LNG) from overseas.

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Market Has Changed
Oil has always been a global market, but natural gas was historically a regional market where prices were set according to supply and demand in North America. LNG is not a new technology, but previously the market was unconcerned due to the inability to grow domestic production, strong domestic demand and the nominal amount of LNG being imported.

The U.S. has imported gas for years to meet domestic demand, but most of this was by pipeline from Canada. However, recent investments all over the world are leading to a large increase in liquefaction capacity, which allows natural gas to be moved to whatever market it can find. (Find out how these securities can protect you from a market bust; read Guard Your Portfolio With Defensive Stocks.)

LNG-Receiving Terminals Being Built
One company that has been involved in this is Cheniere Energy (NYSE:LNG). Cheniere is building several LNG-receiving terminals in the onshore U.S. area. Total SA (NYSE:TOT) and Chevron (NYSE:CVX) have signed agreements with Cheniere to use 2 bcf/d (billion cubic feet per day) of its Sabine Pass facility's capacity.

Cheniere Energy estimates that anywhere from 5-7 bcf/d of incremental worldwide liquefaction capacity will come on line in 2009. Investors are worried that if this capacity is used and heads toward the U.S., the impact on natural gas prices would be devastating.

Long-Term Situation Does Not Appear Brighter
Wood Mackenzie Consultants estimates that in Asia, 44 million tons of capacity additions are planned through 2015, while demand will only be 28 million metric tons in that same time frame.

Chevron has a 50% interest in an LNG project in Australia called the Gorgon. The project involves developing a large offshore natural gas field, and then building the LNG facilities to handle the production. Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.B, RDS.A) each own 25% of Gorgon. Some of this capacity at Gorgon will be sold to India.

Not All Planned Capacity Will Be Built
The Dongii project in Indonesia, which is being constructed by a consortium of Japanese companies to supply natural gas to Japan, said it might have to delay building the project. The reserve estimates for natural gas fields that are supposed to supply the project are now less than anticipated. (Find out how to stay on top of data reports that could cause volatility in these markets; see Become An Oil And Gas Futures Detective.)

Bottom Line
Although natural gas bulls are planning a comeback in 2010 on the back of declining domestic supply and a recovery-led increase in demand, the potential for LNG to flood the domestic market and depress the price is real and must be considered before investing.

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