Look for lower natural gas prices in the third quarter compared to the second due to high storage inventories, strong production in the Rockies and Texas and liquefied natural gas (LNG) supplies, which tend to peak in the summer months, said Canaccord Adams in a Wednesday note.

“In our view, the U.S. natural gas supply and demand are precariously balanced; production declines in the Gulf of Mexico shelf are compensated by the U.S. Rockies and Texas,” wrote analyst Irene Haas. She noted that declining Canadian imports would likely be offset by incremental LNG.

“Barring massive production disruptions from hurricanes and large-scale shut-ins in the Rockies, we might hot have much room for error and we expect Q307 gas prices to be down from Q207 with Henry Hub at $7.00/MMBtu” (compared to $7.62/MMBtu in the second quarter).

Still, Canaccord is not changing its gas price assumptions, which are $7.50/MMBtu for 2007 and $8.25/MMBtu for 2008.

In her note, Haas echoed a previous analysis by Golden, CO-based Bentek Energy of Rocky Mountain region pipeline constraints (see Daily GPI, June 14). She noted the June Rockies price crash and cited pipeline capacity constraints, maintenance and facility outages and a lack of seasonal local demand. “We expect this pricing weakness to persist — this is a function of too many gas molecules chasing limited capacity,” Haas wrote.

Like Bentek, Haas predicted that winter heating demand and Phase II of the Rockies Express will bring relief to the region’s producers. “Meanwhile, we would not be surprised to see voluntary curtailment of production during Q307, and a decline in drilling activity in the U.S. Rockies.”

Earlier this week analysts John Gerdes and Michael Dane of SunTrust Robinson Humphrey/the Gerdes Group wrote that given the energy industry “is currently about 20% free cash flow negative in an upper $7 gas price environment, we find it hard to envision a material increase in North American drilling activity until Nymex natural gas prices approach $9/MMBtu” (see Daily GPI, June 26).

In new report on Canadian gas exports, Calgary-based Ziff Energy Group said net exports from Canada will be falling at a faster rate than the 3% decline seen in 2006.

©Copyright 2007Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.