Setting aside the "near-term noise" in terms of North American natural gas fundamentals, prices should average below $4.00/Mcf this year, with summer contracts averaging around $3.25, Raymond James & Associates Inc. said Monday.
"Despite our expectations for a reduction in drilling activity, we still expect to see huge U.S. gas supply growth in 2011," wrote analyst J. Marshall Adkins and his team. "Specifically, we are modeling U.S. natural gas supply to increase, on average, 4-5 Bcf/d...for 2011. By the way, that means domestic production could very well climb above 70 (we repeat 70) Bcf/d this year."
Even though the U.S. gas rig count has moved lower, the analysts said they believe four underlying supply trends are not being factored in by many of the "supply rollover pundits":
"While it is clear that the natural gas rig count peaked (back in August) and is heading slowly lower, the discussion has now shifted toward gauging the impact to underlying U.S. supply," wrote Adkins and his colleagues. "In our view, natural gas production will be up over 4 Bcf/d (or about 7%) in 2011 despite a 10% reduction in gas drilling activity.
"Does this sound vaguely familiar to the stance we took back in 2008 when the 'industry pundits' were calling for a sharp and massive rollover in production? Do we all remember how that one played out?"
The analysts noted that after the rig count peaked in August 2008, it fell by almost two-thirds (60%) before the U.S. gas supply finally "turned south as high-grading ran its course." Even with the huge drop in drilling activity, the domestic gas supply fell only 2 Bcf/d (or 3%) peak-to-trough.
"This time, we are looking at a much more modest and gradual 10% reduction in drilling activity," noted the analysts. "We once again believe the market is overestimating the impact of these modestly lower activity levels (or rather underestimating the resiliency of supply growth). All in, we see U.S. gas supply growth of 4-5 Bcf/d in 2011, which will likely weigh on U.S. natural gas pricing as we enter the summer."
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