The gap between prices of oil and natural gas could shrink sooner than most experts expect, according to a recent energy market analysis by CME Group, a leading market analyst in the energy sector.

In a report published on Feb. 6, CME Group said it disagrees with the market consensus that natural gas prices will remain much lower than oil prices for at least five years. “Our perspective … is that structural change in the natural gas market is re-setting conditions in a way such that the energy price spread between natural gas and crude oil may close faster than expected,” the analysis states. “If natural gas and crude oil come more directly into competition with each other as sources of energy for end-users, then the energy price gap might be closed in a matter of years.

CME Group points to the transportation sector as the key area where oil and natural gas will be competing on price sooner than many observers realize. “Long dominated by oil and related refined products, natural gas is now moving into the transportation space,” the analysis states. “It is this area of potential direct competition in the transportation sector which we think has the most potential to shrink the price spread between the two energy sources in a more rapid manner than many market participants currently appreciate.”

CME says that investments in natural gas for transportation have been robust. “As of 2012, 1 in 5 new transit buses in the U.S. were natural gas fuelled. The viability of mass natural gas passenger vehicle growth requires a network of CNG filling stations – which may be a long way off. But then again – it might not be so far off. Shell recently announced 100 LNG fuelling stations, and Clean Energy Fuels Corp. built 150 new LNG fuelling stations in 2012/2013.

“The [U.S. Energy Information Administration] estimates that between 2011 and 2040, natural gas usage in transportation will grow at an annual rate of 12% per year. We think this may represent a large underestimate of the growth rate and potential for natural gas to cause a major shake-up within the transportation sector. In 2013 alone, four large companies rolled out new 12-liter LNG engines – which are ideal for heavy duty 18 wheeler trucks.”

 CME sees other examples of natural gas taking hold in the shipping and railroad sectors. Natural gas exports could also help speed a price convergence, according to CME. “Consider how the variability of global and domestic gas prices would be affected by U.S. natural gas exports if untethered from current export restrictions, given that natural gas prices are about three times higher in Europe and even higher in Japan, compared to the U.S.”

“Our base case scenario is that the energy price spread between WTI crude oil and U.S. natural gas will narrow much faster than the official energy agencies or futures markets currently suggest,” the report states. “There may be a lack of appreciation of the large investments in new and expanded uses of natural gas that are in progress but have not yet reached fruition. That is, considerable money and brain power is already being spent to develop natural gas in the transportation sector, although the results are only starting to become visible.

“As the direct competition actually materializes and can be seen by everyone in the energy use data, market perceptions may start to change. Even if natural gas just increases its share of energy use for transportation from 3% to the 7% to 10% range over the next five years, that could translate into a dramatically faster closing of the energy price gap than the consensus now suggests.”

 To download the CME Group report, click here.