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Raymond James: Supply Growth Will Suppress Summer Prices

Despite missing the mark with an earlier bearish projection, analysts at Raymond James & Associates Inc. are sticking to their fretful view of summer gas prices based on the strength of production growth from unconventional basins and "an anticipated uptick in summer LNG [liquefied natural gas] imports."

The analysts admitted that they were caught off guard by "the most significant short-term global commodities rally seen in over two decades," as well as weather over the last six weeks that was 11% colder than 10-year normal temperatures (see NGI, Feb. 18). However, "We are still defying consensus thinking (and losing all popularity contests) by sticking to our belief that there is still substantial risk to summer 2008 U.S. natural gas prices," analysts wrote in a note last week. "As long as winter-ending (March 31) gas storage levels end above 1,300 Bcf, we still think there is a high likelihood that some U.S. gas production will have to be shut in this summer..."

The fourth quarter of 2007 saw a 3.6% sequential and a 7% year-over-year increase in domestic gas production from publicly traded companies, according to Raymond James.

The blame (or credit) goes to production growth out of unconventional onshore plays such as the Fort Worth, TX area's Barnett Shale. As has been the case in the past, independent producers were the principle contributors to production growth, as they increased rig count and production by about 14% year over year, the analysts said.

"We are now observing an unprecedented growth in U.S. gas production," they wrote. "Given that the independent producers are expecting even higher gas production growth rates (15%-plus) in 2008 than the 13.9% growth rate seen in 4Q2007, it is very possible that U.S. gas supplies will be up closer to 4.5 Bcf/d this summer! Again, it is this acceleration in gas production, in the face of a moderating rig count, that has been the primary crutch for our cautious stance on natural gas for 2008."

But as is always the case, the gas supply boom will not last forever, particularly when one considers the characteristics of unconventional supply basins. In the Barnett Shale, initial production rates have been more than five times those of the average well, Raymond James noted.

"Given the continued ramp-up in drilling activity within the Barnett and other resource plays, the question still remains as to when the decline treadmill will catch up and cause gas production to roll over. Our short answer: not yet," the analysts wrote. "Over the long run, however, as decline rates become steeper, it will become exceedingly difficult to grow U.S. gas supply without substantial increases in the rig count."

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