With swelling U.S. natural gas inventories, swooning futures prices, and weather that has recently seen little need for gas as a heating fuel, it’s hard to believe that prices are headed off their current decade lows.

But not according to Chesapeake.

The second-largest U.S. natural gas producer argues that there are good reasons to be bullish on natural gas prices in the medium and long term because of shrinking supply and growing demand from the power, transportation, industrial and export sectors.

In a recent investor presentation, the company argues that the NYMEX forward price curve for natural gas is failing to recognize future supply and demand fundamentals and is likely “one of the most mispriced investments in the market.”

More Natural Gas Vehicle Drivers Will Drive Demand

That’s because a lot more of the fuel will be in demand as electricity generators switch from coal to gas; as petrochemical firms like Shell create chemical feedstocks from ethane, and as more companies switch their vehicle fleets to cleaner-burning natural gas as an alternative to high-priced gasoline and diesel, Chesapeake says.

There are “many reasons to be bullish on intermediate and long-term natural gas prices despite a warm winter and overwhelmingly negative consensus on natural gas,” the company told investors.

It predicts that power companies will increase their natural gas demand by 10-15 billion cubic feet a day over the next decade; that $4 gasoline will force policy changes to stimulate the market for CNG- and LNG-powered vehicles, and that the U.S. and Canada will be exporting LNG by the end of 2015.

The company’s outlook is “very reasonable”, said Lou Pugliaresi, president of the Energy Policy Research Foundation, especially given increased demand from the power sector that is already underway, and the powerful incentive of low natural gas prices on operators of transportation fleets.

“The difference between the cost of gasoline and the cost of natural gas is a real motivator,” Pugliaresi told Breaking Energy.

Infrastructure Will Need Time to Catch Up

Although natural gas prices are expected to rise, the increase is unlikely occur quickly or be very large because some sources of higher demand, notably LNG exports, will take time, and a shortage of filling stations will hinder the widespread adoption of natural gas vehicles by individual drivers, he said.

“Is it likely that the price will move off $2?” he said. “Yes. But the road back to $5 or $6 is going to take a while.”

For the U.S. trucking industry, seen as a leading candidate for widespread conversion to natural gas, upward pressure on diesel prices is likely to remain this year and beyond because of current strains on domestic refining capacity and geopolitical concerns. These factors create a stronger incentive for operators to switch to natural gas, Chesapeake argues.

On the supply side, the company says production will fall as drillers, including Chesapeake itself, continue their recent move away from dry gas toward higher-priced oil and natural gas liquids.

It is called the supply contraction “the single biggest misunderstood aspect of the future bull case for U.S. natural gas.”

But there’s enough dry gas production that’s economic even at lower prices to prevent much of a rise in the market, countered Michael Lynch, president of Strategic Energy and Economic Research, a consultant in Winchester, Mass. “There’s a lot that can be produced at $3-$4,” he said.

Lynch argued that Chesapeake’s transportation assumptions, like those of its report overall, are “too optimistic” and that futures prices will rise “modestly over $3” in the next 12 months.