The pullback in natural gas prices seen last week is just the beginning of a downward slide that could continue for the next six months, according to analysts at Raymond James & Associates Inc.

“As we have detailed numerous times, a further weakening of gas prices should be driven by a sharp increase in U.S. natural gas production, easier y/y [year-over-year] liquefied natural gas (LNG) comparisons (starting in September) and easy weather comparisons (starting in August),” the analysts wrote in a Monday research note. “Of course our bearish outlook also assumes 10-year average weather and no hurricanes.”

Last Friday August gas futures closed at $10.570, $1.334 lower than the previous week’s close, marking their second bearish week (see Daily GPI, July 21a). Last Friday’s cash market also posted losses (see Daily GPI, July 21b). However, developing weather conditions were lending price support Monday as Tropical Storm Dolly was poised to enter the Gulf of Mexico (see related story).

While predicting a further pullback in gas prices, the Raymond James analysts noted that they don’t expect this to affect drilling activity for a number of reasons. For one, exploration and production companies have hedged production at “extremely attractive levels.” Also, higher coal prices have raised the floor under gas prices to more than $7/Mcf. Growing production from unconventional resource plays appears to be economic at or below Raymond James’ $7.50/Mcfe 2009 price estimate. Finally, oil-directed drilling accounts for more than 20% of total activity in recent months.

“Additionally, recent rig permit data indicates that drilling will continue to rise in the near term with record permits issued in the past couple of months (up 16% year-over-year),” the analysts wrote.

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