Canaccord Genuity on Wednesday cut its 2012 natural gas price forecast by 50 cents to $4.00/Mcf on the strength of gas-directed and oil well-related gains in the U.S. onshore.

The price reduction follows those by other analysts in recent days. Raymond James & Associates Inc. cut its price forecast to $4.00/Mcf from $4.25 “with bias to the downside” (see Daily GPI, Oct. 11). FBR Capital Markets reduced its outlook for 2011 to $4.28/Mcf from $4.38 and its 2012 outlook to $4.50/Mcf from $5.00 (see Daily GPI, Oct. 17).

“On the natural gas front, given the likelihood of only modest growth in demand, we believe the shale-driven uplift in gas well productivity compounded by elevated drilling activity and the gas contribution from increased U.S. oil development should leave the gas market meaningfully oversupplied,” said Canaccord’s John Gerdes. “Consequently, we anticipate a $4 average gas price in 2012.”

Gerdes, Cameron Horwitz and Ryan Oatman said their research indicates that gas-directed activity next year is expected to be lower by 75 rigs to average 800-850 rigs. They are maintaining a 2013 gas price expectation of $5.00/Mcf, but admitted that it may be an optimistic forecast.

The “gas rig count continues to exhibit astonishing resiliency,” said Gerdes and his colleagues. “The gas rig count is on pace to average 900 rigs this year, which is only 40 rigs less than last year’s average.” In 3Q2011 the gas rig count rose by 50 rigs, with about half of the additions in liquids-rich areas of the Eagle Ford Shale, they noted.

Almost every U.S. exploration and production company “suggests their gas development plans generate acceptable returns in a $4-5 gas price environment,” which means “the gas rig count is likely to remain stickier for longer.”

Since its assessment last summer, the Canaccord trio noted that the industry has experienced a “minor degradation” in rig/well productivity, which they attributed to classifying liquids-content Eagle Ford activity as gas well drilling. The minor decline, combined with lower-than-expected gas output in the Gulf of Mexico, indicates that domestic gas output “should increase 3.6 Bcf/d this year versus our prior expectation of 4.1 Bcf/d. This implies 0.3 Bcf/d average sequential monthly U.S. onshore production growth this year versus 0.5 Bcf/d per month on average in ’10.”

Blossoming domestic oil developments have “meaningfully” contributed to gas growth, said the analysts.

“Since diverging from historic norms in the fall of ’09, the oil rig count has more than tripled and now constitutes over half of U.S. drilling versus 20% in ’07-’09. In ’11, we expect the oil rig count to increase 350 rigs. In ’12, we anticipate the oil rig count increases a further 100 rigs and by 50 rigs per annum thereafter.”

Assuming gas comprises 15-20% of the output of an average oil well, “which seems reasonable given several major oil resource plays have at least a 20% gas composition (i.e., Barnett Combo, Bone Spring/Avalon, Eagle Ford), we expect the increase in U.S. oil development should contribute 2 Bcf/d of incremental gas supply by year-end ’11 and almost 4 Bcf/d by year-end ’12.”

Canaccord’s Marcus Talbert said the gas contribution from U.S. oil developments and the “shale-driven uplift” in gas well productivity, as well as incremental leasehold capture/joint venture drilling, will keep the domestic gas market oversupplied for “the next couple [of] years.”

U.S. oil drilling isn’t expected to slow its pace either.

“With no concerns related to the oversupply of domestic oil volumes in terms of the current demand context and leasehold capture issues present within many of dominant liquids-rich trends, we are expecting strong drilling and permitting activity to continue into 2012,” said Talbert. “Additionally, we estimate producers have hedged out 30%-plus of 2012 volumes and are increasingly seeking alternative sale points to circumvent the West Texas Intermediate/Brent spread. While the potential for further economic deterioration is a big concern, we remain confident that liquids-directed drilling will remain robust heading into 2012.”

©Copyright 2011Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.