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Raymond James: Resource Plays to Drive Down Prices

Production from publicly traded companies, which was up 7% in the first quarter of the year, is being driven by stronger productivity from rapidly growing onshore resource plays like the Barnett Shale, temporarily overcoming the declining initial well productivity trends of core U.S. supply over the past decade, Raymond James & Associates said.

Gains in drilling efficiencies should eventually slow, at about the same time that field decline rates trend higher and overall prospect quality diminishes, analysts J. Marshall Adkins and Wayne Andrews said in a Stat of the Week.

"Unfortunately, with the emergence of new shale plays nearly every month, it could be years before these U.S. gas supply growth rates begin to taper off," they said. "That means gas prices are very likely going lower. While gas prices may not fall in the next month or two, these bearish supply trends will likely manifest themselves into lower gas prices sometime in the next six to 12 months.

"We continue to see unprecedented growth in U.S. gas production that will eventually overwhelm the U.S. gas markets."

Mild temperatures this summer could drive prices down -- way down, the analysts said.

"According to our summer gas model, which assumes 10-year average weather throughout the summer, the U.S. will be on the brink of having to shut in gas production near the tail end of summer. Since there is a 50/50 chance the weather will be colder or warmer than the 10-year average, we continue to believe that there is a 50/50 chance that gas prices collapse later in the summer. If summer weather is warmer than normal, summer gas prices will probably remain above $10. If the weather is mild -- colder than the 10-year normal -- then we very well could see sub-$6 gas later this summer," they said.

Over the past five years Raymond James has seen domestic gas production trending down; during the past year that trend has reversed and the analysts said they are now observing "unprecedented growth in U.S. gas production."

The start-up of the Independence Hub natural gas deepwater production platform last year (see NGI, July 23, 2007). is serving to temper the historical declines out of the Gulf of Mexico, the analysts said. The hub, which went off-line on April 8 due to a leak on the associated Independence Trail pipeline, is due to restart in the first half of June, provided there are no unexpected weather issues, according to Enterprise Products Partners LP (see NGI, May 19). The current outage is suspending the production of approximately 900 MMcf/d.

Despite the moderation in overall U.S. drilling activity, the shift toward resource plays should cause gas supply to continue increasing steadily through 2009, the analysts said.

"In fact, if we look at production guidance from U.S. gas producers, we can extrapolate [year-to-year] growth in total 2008 U.S. wet gas supply of around 4.5 Bcf/day, or 7.5%. It is this continued surge in domestic gas supply that is the cornerstone of our cautious stance on natural gas prices in the back half of the year," they said.

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