The rig count may be half of what it was a year ago, but Northeast dry natural gas output just keeps getting stronger.

Five years since natural gas from shale began making an impact on U.S. production, supply growth continues to be more robust than consensus estimates, with nearly all of new domestic supplies now coming from the Northeast, otherwise known as the Marcellus Shale, according to analysts.

Raymond James & Associates Inc.'s J. Marshall Adkins and John Freeman last week released a semi-annual review of U.S. gas supply growth and their projection. After fine-tuning projections for each major onshore basin, the analysts now see gas supplies growing 2.4 Bcf/d year/year in 2014 and reaching 79 Bcf/d, or 12 Bcf/d plus, by 2020.

"Consensus continues to call for an eventual rollover of supply, and we tend to agree," Adkins and Freeman wrote. "However, we don't see this happening anytime soon. The fact remains that drillers are going to continue to tap the vast domestic resource potential using the most efficient means possible, driving an oversupply of both oil and gas for a long time."

The U.S. rig count forecast remains below consensus, "but we believe pad drilling, footage drilled and rising type curves more than offset that decline." Operators are becoming more efficient every day compared with a year ago, which has resulted in better well productivity and more wells per rig. However, the dry gas rig count has collapsed as better prices for oil drew exploration and production operators away.

"The shocking revelation -- to many that aren't doing the bottoms-up modeling -- is that U.S. gas supply is still growing despite the collapse in gas drilling," wrote Adkins and Freeman. The gas rig count has been cut in half year/year, but the U.S. Energy Information Administration (EIA) reported that July dry gas production rose 1.2 Bcf/d year/year (see NGIOct. 7).

U.S. gas supply was up 1.0 Bcf/d in 2010, 4.3 Bcf/d in 2011, and 3.8 Bcf/d in 2012. However, it continues to be all about the Marcellus Shale, where dry gas output has risen to an estimated 7.5 Bcf/d now from 0.4 Bcf/d in December 2009 (see NGISept. 30).

"Despite losing 20 gas rigs, Marcellus dry gas production is up a whopping 2.3 Bcf/d this gas year," analysts noted. It's because "it actually works at sub-$3.00 gas prices as a result of refined completion techniques and pad drilling that are generating higher rate wells. The scary thing is that these numbers could even be higher if infrastructure constraints were not choking back production."

There's a "healthy backlog" of uncompleted Marcellus wells and new infrastructure to relieve some constraints in the next two years and the play by itself should add "roughly 3.5 Bcf/d of takeaway capacity this year followed by 5-7 Bcf/d of projected takeaway capacity coming online in 2014."

A recent slowdown in the gas growth rate primarily is attributed to a "more aggressive shift away from dry gas drilling" to liquid targets, infrastructure constraints and wintry weather, which negatively impacted growth in the first three months of this year. But don't be lulled into a false sense of complacency.

Raymond James' bottoms-up model indicates that 2014 gas supply should be up 2.4 Bcf/d from 2013.

"What's even more staggering is that as infrastructure debottlenecking continues and gas drilling activity rebounds in 2015/16, we think U.S. gas supply will be up plus-2.6 Bcf/d in 2015 and plus-2.2 Bcf/d in 2016."

With gas supplies still expanding on little market incentive, prices may remain relatively muted or depressed for at least a couple more years, according to Credit Suisse analysts.

"There is great demand growth but very great supply growth at relatively low costs," said Jan Stuart, who heads the energy commodities research team. "There is terrific growth for the end of the decade" for demand growth from industrials, power generation and gas exports, among other things, he said during a conference call last week.

Substantial growth in industrial demand is expected around 2015 as big petrochemical expansions/newbuilds come online. By the end of the decade, industrial, electric power, Mexican exports and natural gas vehicle growth could "conservatively add 12 Bcf/d to demand," said Stuart. The base case scenario for liquefied natural gas exports also calls for 8.5 Bcf/d by 2020.

"A supply-cost model of today's known resource plays would tell us there should be ample low cost shale production to meet new demand at sub-$5.00 prices."

Determining how much onshore gas may be produced all comes back to the mother lode, the Marcellus Shale. From 2005 to 2010, gas supplies from the Marcellus rose 1.6 Bcf/d. From 2010 to 2013, supplies jumped 8.6 Bcf/d, according to Credit Suisse.

In the South/Southeast basins, which include Texas and the Midcontinent, gas supplies between 2005 and 2010 rose 1.6 Bcf/d -- about the same as in the Marcellus. However, from 2010 to 2013, output only rose by 0.2 Bcf/d. Gas growth is no better in the West, which includes the Rocky Mountains, where supply from 2005 to 2010 climbed by 2.2 Bcf/d. From 2010 to now, gas output has fallen by 1.6 Bcf/d.

"The Northeast is the nexus of U.S. supply growth," Stuart said. And the "Northeast infrastructure bonanza continues," with gas pipeline capacity expansions offering another 4,977 MMcf/d by the end of this year. Between January and December 2014, 4,121 MMcf/d more of capacity is slated to be added in the Northeast. Processing capacity additions in the Northeast should increase by 2,815 MMcf/d by the end of this year and by another 1,920 MMcf/d at the end of 2014.

"It underscores how important the Marcellus is" to the U.S. supply and demand forecast, said Stuart.

Credit Suisse has tempered its gas price forecast for 4Q2013 to $3.75/MMBtu from an earlier prediction of $4.20 (see related story). Full-year 2013 prices are seen averaging $3.70 from $4.00, while full-year 2014 prices were reduced by 10 cents to $3.90. In 2015, prices should average $4.20 from $4.40; 2016 to $4.40 from $4.70; and long term, the forecast is $4.50.

The Northeast "cost curve still is being pushed to the right, with very significant growth and improved drilling and completion efficiencies in the Utica and Marcellus," said Stuart. "We are not exactly bullish" through most of the rest of the decade. Still, the short-term appears promising for prices. "We are only a little bit bullish this coming 1Q2014 because we think supply and demand for U.S. natural gas looks quite interesting this winter...What looks quite simply, for the first time in 'forever' we can give you a negative residual on end-of-season storage projections."

By the end of October, U.S. stores should be around 3.80 Tcf, but they could fall to 1.55 Tcf by March 2014 under normal weather, according to Credit Suisse. "In addition, we think the supply side may be short if indeed there's not enough of midstream capacity additions, in the Marcellus especially, coming onstream," said Stuart. "Of course, we are forecasting normal weather and it would have to cooperate for our relatively bullish forecast to come true."

What has happened to the markets in terms of recent under performance is mild weather, headwinds from nuclear generation and "terrific growth" in wind generation, which didn't help the gas markets, said Stuart. When dry gas targets once again are taken up by drillers, costs should begin to come down, which again may lead to a bigger demand pull.

Based on studies of shale gas and oil models, a "decline issue" is coming, but it will be more prominent on the oil side relative to the market, with reserves increases relatively small, he said. "We think U.S. oil shale production will plateau in the next decade. But we have enormously large gas...It's well understood that the issue of playing out is quicker in oil than natural gas...The shale revolution needs to be seen as a gas revolution..."

Barclays Capital's Biliana Pehlivanova said gas markets turned a corner this year with supply/demand balances on a tightening trajectory.

"The wave of demand increases, falling imports and accelerating exports will require production growth, which means that natural gas prices will have to head higher," Pehlivanova said. "This is good news for coal, but only marginally." How high gas prices may go depends on the ability of exploration and production companies to deliver growth at given prices.

"Here, the bulls are forced to pause...Many industry participants, including ourselves, were expecting production to tip into declines this year as a result of a significant decline in gas-directed drilling. But data so far have not supported this view. Largely, this has been a result of exceptional growth in the Marcellus and Utica."

Barclays now expects Lower 48 dry gas output to increase 700 MMcf/d this year and by another 1,200 MMcf/d in 2014.m"These production forecasts are impressive because at current natural gas prices, only a handful of dry gas plays are economical," wrote Pehlivanova. "The Marcellus boasts returns rivaling those of marginal oil wells in the Bakken and the Eagle Ford," and the Utica may prove as attractive. The Fayetteville Shale is on the margin at about $4.00/Mcf, but beyond those plays, dry gas targets mostly are uneconomic.

What could turn over more dry gas would be an uptick in prices, which would impact plays mostly abandoned. The Barnett Shale "would need a gas price of over $4.24 and the Haynesville over $4.86 to attract more drilling. In addition, a significant, and growing, portion of gas supply is coming in association with oil. In particular, we follow closely associated gas production in Texas and North Dakota, which last year increased 1.4 Bcf/d."

Barclays analysts are calling for $3.73/Mcf prices on average this year followed by $3.88 in 2014. A "modest improvement" is expected in 2015 to $4.15, with long-term prices set at $4.75. These gas prices should "limit upside to thermal coal prices."