Even with a rig count reduction of 800 — which is what’s needed to rebalance the market — natural gas production shut-ins are likely this summer, Raymond James & Associates Inc. analysts said in a note Wednesday.

“Although some components of our longer-term bullish outlook on gas remain in place, such as a steepening overall decline rate and lower Canadian imports, an extension of the surge in U.S. production from shale plays should dominate market forces for the foreseeable future,” the analysts wrote.

Further, producers are making only marginal returns on some activity given Raymond James’ price outlook. Look for “curtailment of at least the most marginal projects,” they wrote.

On Monday Raymond James again cut its rig count forecast, predicting a reduction of 41%, or 850, for 2009 (see Daily GPI, Dec. 9).

The analysts reiterated their $6.75/Mcf price forecast for 2009. “Even after 300 Bcf of hurricane shut-ins, soaring domestic production has left the market within a stone’s throw of last year’s record-setting storage level,” they wrote. “Industrial demand looks to have rolled over, and crude’s continued fall now leaves residual fuel oil at more attractive prices than natural gas in the Northeast, which may cause switching back to oil.”

In the longer term, declining industry activity and increasing decline rates should yield a long-term gas price that reflects current cost structures in the industry, the analysts said. “We believe this equates to a long-term average in excess of $8/Mcf.”

For producers that can weather the storm, there is reason to be optimistic. The Raymond James analysts predict that as the benefits of domestic gas are recognized for their relative environmental friendliness and global gas markets develop, “eventual price parity with crude oil is likely.”

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