The too-much-of-a-good-thing story of natural gas continued Friday as analysts at Tudor, Pickering Holt & Co. updated their outlook to 2 Bcf/d of annual onshore supply growth, which far outstrips their 1 Bcf/d projection of normalized demand growth.

That means gas prices will need to stay low enough to entice power generators to rely more heavily on natural gas relative to coal-fired plants until the rig count falls enough to balance the market, they said. At $60/ton Appalachia coal, $4/Mcf gas results in about 2 Bcf/d of switchable power sector demand, they said.

While the analysts did not change their last price deck projection ($4.50/Mcf in the fourth quarter; $5/Mcf for next year and 2012; and $6/Mcf for 2013 and beyond), "the bias in the next few quarters is lower.

"At the current gas-directed rig count, onshore supply is growing 2.5 Bcf/d y/y versus our prior prediction of 1 Bcf/d.

"Gas supply is very sensitive to shale rig count and drilling efficiency. Reducing rig count by 100 in the emerging shales (50 Haynesville, 25 Marcellus, 25 Eagle Ford) would result in a 1 Bcf/d reduction in annual growth (from 2.5 Bcf/d to 1.5 Bcf/d y/y). A reduction in non-shale onshore rig count by 100 would reduce growth by only 0.6 Bcf/d. We are not anticipating a quick rig count remedy to reach supply equilibrium, [not until the second half of 2011] at the earliest."

The analysts noted that the rig count in gas shale plays increased faster than they had expected a year ago -- by about 500 rigs as opposed to the expected 400. Also, wells were drilled and completed faster than anticipated. Production from the Anadarko Basin was more than expected, thanks to the performance of Granite Wash wells and a rig count that was twice what the analysts forecasted.

However, looking beyond the six major shale plays and the Anadarko Basin, the TPH supply model accurately predicted a decline in net onshore production of 70%.

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