Nearly mirroring survey results of other energy analyst groups in recent days, Raymond James said last week that U.S. natural gas production fell 4.2% in the first quarter year-over-year, and “as before, we see no significant near-term catalysts to alter the declining supply picture, and therefore, price rationing remains the only viable option to bring the market into equilibrium.”

If oil prices remain near the $40/bbl level, “that would imply fair value for gas above $7/Mcf,” said J. Marshall Adkins, Jeffrey L. Mobley and Wayne Andrews in the latest “Stat of the Week.” After adjusting the data for property acquisitions and divestitures, gas production also declined 0.5% sequentially.

The Raymond James analysts questioned the latest data by the Energy Information Administration (EIA), which reported that U.S. natural gas production was not falling, but rather, is rising at a small rate.

“Though EIA data for 2003 has gone through several downward revisions, it still shows a year-over-year production increase of 0.6% for the entire industry last year,” they said. “This conclusion from EIA seems to defy common sense when one considers that our surveys cover 48 of the largest natural gas producers in the United States, representing roughly 60% of total domestic gas production. Given that 60% of production was down 4.2% year-over-year in Q1, the other 40% would have to be up a whopping 6.3% in order for total production just to break even!”

Even with the 20%-plus rise in drilling activity over the past year, “it seems clear to us that U.S. natural gas production continues to fall. This is contrary to what many of the natural gas bears have been suggesting over the past year. Perhaps more importantly, the majors (and gas utilities) continue to show the biggest decline in U.S. natural gas production, coming in this quarter at down 9.2% versus last year and down 1.0% sequentially.”

The analysts said the utilities’ and majors’ declining production is important because they represent a large portion of U.S. gas supply and drilling activity that has been essentially flat since the beginning of 2003. “This indicates that further production declines lie ahead for this group.”

The independents, noted the analysts, have been responsible for putting an additional 80 rigs to work — a 34% increase since April 2003 — “and yet their corresponding production grew only 0.8% year-over-year and was actually down 0.1% on a sequential basis.” At current gas prices, “these companies are making excellent returns on almost every prospect they drill,” but as a group, “they have not been able to ‘move the needle’ on U.S. gas supply.”

Remaining bullish on North American gas, the Raymond James analysts said their “energy thesis has been and continues to be centered on the underlying problem of falling U.S. natural gas production.” Given the inherent decline in gas wells, combined with a “muted response” to drilling activity, “we expect domestic gas production levels to continue trending south for the next several quarters.”

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