Natural gas output from the rapidly growing number of onshore oil rigs will keep the domestic market “meaningfully” oversupplied through 2012 and challenge storage capacity through 2013, energy analysts said Tuesday.

Canaccord Genuity analysts John Gerdes, Cameron Horwitz and Ryan Oatman said the pressure on gas markets will temper prices for the next two years.

“Compounded by only modest growth in natural gas demand, we believe the gas contribution from material growth in U.S. oil development, the shale-driven uplift in gas well productivity and incremental leasehold capture/joint venture drilling activity will leave the gas market meaningfully oversupplied the next several years,” said the trio.

“Consequently, we anticipate a $4-5 gas price environment through 2013.”

The price forecast mirrors that of other energy analysts. Raymond James & Associates Inc. earlier this month said U.S. gas prices will average below $4.00/Mcf this year, with summer contracts at about $3.25 (see Daily GPI, April 5). Standard & Poor’s (S&P) late last month said domestic gas prices will remain pressured for one to two more years (see Daily GPI, April 1). S&P’s price deck is $3.75/MMcf in 2011, $4.00 in 2012 and $4.50 “thereafter.”

The new oil shale wells will be contributing a lot of gas supplies, noted the Canaccord Genuity team. Assuming gas output comprises about 10-20% of the average output from unconventional oil wells, growing U.S. oil development should contribute 1.5-2.0 Bcf/d of incremental gas supply by year-end 2011 and 3 Bcf/d by year-end 2012, the analysts said.

“This suggests 0.2 Bcf/d average sequential monthly U.S. production growth this year and roughly stable U.S. gas production in 2012/2013. For reference, U.S. supply grew 0.5 Bcf/d per month on average in 2010.”

However, gas output from the oil shale wells is probably higher than 10-20%, they said, because “several” onshore unconventional oil plays already are showing output of “at least” 20% gas, including three in Texas: the Barnett Combo, Bone Spring/Avalon and Eagle Ford.

The oil rig count since the fall of 2009 “has more than doubled and now constitutes essentially half of U.S. drilling versus 20% in 2007-2009,” said the analysts. This year they expect the oil rig count to increase by 200 rigs and the gas rig count to decline by 100-plus rigs. In 2012 the oil rig count is expected to climb by another 100 rigs while the gas rig count stabilizes at 750-800 rigs.

Meanwhile, horizontal drilling activity now is approaching 60% of total U.S. drilling activity, triple that of 2007 (20%). And gas development productivity over the past four years has more than doubled, “which implies horizontal development delivers almost triple the gas supply per unit of time as legacy vertical development.”

Given the gains in gas well output, losing more than 100 rigs onshore this year and averaging 750-800 rigs in 2012-2013 “appears insufficient to prevent gas in storage entering the next three heating seasons from overwhelming practical U.S. storage capacity,” said Gerdes and his team. “As a consequence, we see the likelihood for episodes of acute gas price weakness entering each of these heating seasons.”

Also weighing on gas prices are the held-by-production leaseholds and joint ventures, which the analysts estimated have made about 100 onshore gas rigs “indifferent” to gas prices.

©Copyright 2011Intelligence 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.