With the U.S. natural gas rig count down dramatically, domestic gas supplies should fall by 2 Bcf/d or more, or by 4%, by year’s end, setting up a peak-to-trough decline of almost 5 Bcf/d, or 9%, by the middle of 2010, analysts with SunTrust Robinson Humphrey/the Gerdes Group (STRH) said Monday.

“This year’s experience suggests 800 gas rigs and $6 gas prices [are] not sufficient to maintain U.S. gas supply,” wrote STRH’s John Gerdes, Cameron Horwitz and Ryan Oatman. “In ’09, the U.S. gas rig count should average 800 rigs and U.S. gas supply should experience modest erosion during the year. At the same time, U.S. gas producers should realize a $6 hedge-adjusted Nymex [New York Mercantile Exchange] equivalent average gas price and remain 10-15% free cash flow negative for the year.”

Assuming even a “modest” improvement in industrial productivity, for 2010 “we conclude that a 900-1,200 gas rig count and $7-8 natural gas prices are necessary to maintain U.S. gas market equilibrium,” the trio wrote.

U.S. gas-fired power output this year “has been immune to weak economic conditions” because more gas-fired generation is being used by Southeast/Mid-Atlantic power producers “to the detriment of comparatively priced coal-fired generation,” they wrote. From September through the end of this year, “industrial gas demand should be only slightly below last year given easy hurricane/economic comparisons.”

If U.S. economic recovery continues at a moderate pace through 2010 and assuming oilfield service price inflation of 10%, an $8/MMBtu gas price “appears necessary” for 2011, said the STRH analysts. “Accordingly, the gas rig count should average 1,025 rigs in ’11. Given the further and meaningful uplift in activity, well/rig productivity is expected to plateau.”

Echoing other observations about the abundance of domestic shale resources and improved drilling technologies, the STRH analysts estimated that U.S. onshore productivity improved “an astounding 30% in ’08 and should improve a further 15% this year” even though U.S. gas-directed drilling slightly fell in early 2008.

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