The energy analysts with Raymond James & Associates Inc. on Monday offered no good news to gas bulls that had toasted to a prosperous new year in 2011.

In the latest Energy Stat of the Week, analysts J. Marshall Adkins, John Freeman and Darren Horowitz again offered another cautionary forecast.

"By now, we have probably shed our 'perma-bull' gas price reputation on the Street," the trio wrote, referring to their once bullish price outlooks in the last decade. "In fact, we flipped to the bearish side of the gas trade three years ago and remain there for 2011."

The United States, they wrote, "will remain structurally oversupplied with gas until we see a step-change upward in demand. While that demand will eventually come, it will likely take a few years for the power industry to transition away from coal and toward natural gas; the industrial consumers of U.S. natural gas to ramp up capacity to fully take advantage of this imbalance between oil and gas prices; and the transportation infrastructure in the U.S. to embrace natural gas."

One reason gas prices aren't expected to rise this year is because domestic gas output in 2010 increased 0.5 Bcf/d a month in 2010, according to Raymond James.

"Even if we conservatively assume that monthly growth rate slows by half to 0.25 Bcf/d, core gas supply would still increase 3.5 Bcf/d (over 5%) in 2011," wrote the analysts.

Exploration and production (E&P) operators "drilled right through $4.00/Mcf gas prices in 2009 and 2010, and we expect them to continue to do so in 2011..." based on three factors:

"Yes, activity will fall in some of the vertical and horizontal dry gas areas but we expect that these areas will only account for about a 10% reduction in overall U.S. gas drilling activity in 2011," said Adkins and his colleagues. "If the U.S. gas rig count only falls 10%, U.S. gas production will continue to increase substantially into 2012."

There are some "directional positives" seen for gas prices this year, including expected higher gas-fired and industrial demand, said the trio.

However, "a return to 'normal' weather would offset much of this demand growth by reducing U.S. gas demand by about 1 Bcf/d," said the Raymond James team. "This means we'll need at least 3 Bcf/d of incremental coal-to-gas switching to avoid shut-ins next summer. This is simply not likely to happen if gas prices are above $4/Mcf."

The analysts' bias "remains to the downside. Long term, we are maintaining our $5.00/Mcf forecast as the rig count will slowly but surely begin to fall as leasehold requirements ease in the latter half of 2011 and throughout 2012."

The "former mantra" of "drill, baby, drill" has taken a back seat to capital discipline at many E&Ps, but the analysts noted that their E&P coverage group "is heading into 2011 with much less gas production hedged than in years past, and we would not be surprised to see companies cut rigs and/or capital expenditure [capex] budgets even further in the back-half of the year."

The overall cuts in spending won't be enough to slow supply and rebalance the market,"but it's a step in the right direction," said the Raymond James team.

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