Analysts at Raymond James & Associates aren’t quite ready to pack up their bull horns and nose rings, but they had to concede Monday that the domestic gas supply picture is improving. To them that simply means the domestic gas production decline isn’t as steep as they previously projected.

In contrast to the numbers crunchers at the Department of Energy, analysts at Raymond James believe production still is declining and will continue to do so for the foreseeable future despite the massive drilling effort now taking place across the continent. Nevertheless, they did find that after excluding the impact of hurricane Ivan in the fourth quarter of 2004, domestic gas production would have been down only 0.7% to 1.2%.

“While the rate of decline in U.S. natural gas production appears to have slowed, we emphasize that just getting to this point took an immense effort for the industry,” said Raymond James analyst Jeffery L. Mobley. “The industry is now at virtually 100% utilization of offshore gas rigs and gains in drilling efficiencies have also been significant over the past two years.”

However, he said that going forward “constraints on rig availability” should be more noticeable and gains in drilling and production efficiencies “should slow.” Meanwhile, the quantity of drilling prospects is declining and organic decline rates at existing wells continue to rise. This means that the U.S. supply picture will remain “quite constrained,” said Mobley.

“Much like the 1970s when oil production continued to fall regardless of how many rigs were drilling, we think we are nearing if not at a similar crossroads in the U.S. gas supply picture.”

He said domestic supply declines in 2005 and 2006 will be “less severe than those observed in 2004.” But to Raymond James this means prices will actually go up from where they are currently because the industry is in the process of working off a “weather-induced” gas storage surplus. Once the surplus is gone, Mobley predicts the gas price will “revert to the traditional 6:1 Btu parity with oil,” leaving gas prices at about $8 when oil is at $50/bbl.

Of course Raymond James’ entire supply outlook is based on a snapshot of only about 50% of U.S. production. The rest is pure speculation and diverges sharply from what the Energy Information Administration (EIA) is projecting.

The EIA predicts that annual domestic gas production will rise 0.5% this year and 1.8% next year to 19.1 Tcf. Henry Hub gas prices, EIA says, will fall this year to $5.81/MMBtu from $6.05 in 2004, but will rise to $6.61 in 2006.

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