Start Your Engines: NatGas Revs for Transportation

Honda's compress natural gas powered Civic GX undergo final testing at the Japanese automaker's Greensburg, Indiana plant.
Mira Oberman | AFP | Getty Images
Honda's compress natural gas powered Civic GX undergo final testing at the Japanese automaker's Greensburg, Indiana plant.

Despite the slow rate of adoption of natural gas to fuel motor vehicles, a confluence of trends in favor of natgas is shaping up to loosen the stranglehold petroleum has on the transportation fuel market, according to Citigroup.

In a lengthy research report this week, the bank cited rising global natgas supplies, its relatively cheap price and ongoing environmental concerns among factors that "virtually guaranteed" an era where natgas would challenge the dominance of crude and distillates in the transportation market. Specifically in the U.S., the shale boom transforming energy markets is providing a major impetus to natural gas, Citi said.

"These trends are building momentum and mutually reinforcing one another at the same time that new engine and battery technologies are emerging," Citi's analysts said. The bank cited "clear opportunities" for natgas to supplant oil, primarily as fuel for ships, gas powered vehicles and in generating power – a phenomenon already underway as utilities shift away from coal.

(Read more: Cheaper Power Bills? You May Have NatGas to Thank)

Natgas prices have fluctuated wildly over the last year, but U.S. prices still remain far below those seen in Europe and other parts of the world – helping to make the case for a relatively cheap and abundant energy source. On Thursday, natural gas futures plunged to a three-month low, in the wake of an Energy Information Administration report that showed supplies rose more than expected.

According to Citi, "the growth in gas supply should lower global gas prices from current levels, mitigate future price increases due to higher demand and the delinking of natural gas and oil prices, now prevalent in North America, should spread around the world."

Global proven oil and natural gas reserves top 200 trillion cubic meters, according to research from Citi and oil giant BP. And because natural gas is a cleaner fuel source than petro-based fuel, it can go a long way toward addressing concerns about the environment.

A recent study by the Center for Climate and Energy Solutions said the rising utilization of natgas in both residential and commercial use could help cut greenhouse gas emissions. Although global warming worries have received less attention from policymakers in recent years, advocacy groups are still lobbying Washington and other global capitals to advance sweeping climate change legislation.

Still, the linchpin of natural gas adoption rests on its ability to become a substitute for oil. At present, most of the demand for crude and distillates comes from heavy duty trucks and vehicles, such as trucks and railway cars.

Citi estimates that by 2020, natgas could displace as much as 1.8 million barrels per day of oil, or five percent of the current level of oil consumed for transportation purposes. Should the economics prove advantageous, "the percentage could be higher" the bank added.

If trends continue, natural gas could even help curb global demand for crude, Citi said, saying that demand for traditional oil "may be topping out much sooner than the market expects. The shift from oil to gas is already underway in the U.S., where the shale gas revolution is giving a large economic incentive to make the switch."

(Read more: Peak Oil Theory Now Sparking Talk of 'Peak Demand': Analysts)