The U.S. natural gas supply is beginning to fall, but not as fast as many may think, according to public company data reviewed by Raymond James & Associates Inc.

Analysts John Freeman, J. Marshall Adkins and Cory Garcia reviewed 2Q2009 gas production figures for producers they cover, which comprise around half of total domestic gas production. The results are reported in Raymond James’ latest “Stat of the Week.” Yes, the domestic gas market has become “markedly tighter” over the past few months, but they said the data show it may not as be as tight as some suspect.

“The gas bulls are taking this as a sign that the long-anticipated gas production roll-over is finally materializing and U.S. gas supply is falling off a cliff,” wrote the trio. “Whoa, Nelly! Not so fast, my friends. The results from last quarter’s (2Q2009) public company U.S. natural gas production survey are just in and it suggests that U.S. gas supply has finally begun to roll over, but at a very slow pace.”

Form 914 data compiled by the Energy Information Administration (EIA) indicate that hurricane-adjusted domestic output in 2Q2009 was down 2 Bcf/d from its peak in 4Q2008. However, public filings show hurricane-adjusted U.S. gas supply “is down only 0.5 Bcf/d from a first quarter of 2009 peak. This is a big difference in U.S. gas supply trends and has profound implications for gas prices over the next six months,” said the Raymond James team.

U.S. gas output is growing, said the analysts, even with “some lingering and perhaps permanent shut-in volumes” related to hurricanes Gustav and Ike last year.

“More noteworthy, we believe that the combination of voluntary shut-ins, delayed natural gas well completions and pipeline constraints somewhat distorted and understated the ‘true’ second quarter 2009 U.S. gas supply picture,” said the analysts. “While readily acknowledging the difficulty and potential error in adjusting for these factors, we would conservatively assume that adding back these volumes might have yielded an underlying y/y [year/year] gas supply growth rate closer to 7.5% (or 2.3 Bcf/d).”

Instead of falling, domestic gas production is more or less plateauing, said the trio.

“Our 2Q2009 public company production survey showed a decline of 0.3% (or 0.1 Bcf/d) relative to the peak 1Q2009 figure. If we add back the hurricane-related outages, the sequential decline would have been closer to 1.4% or 0.5 Bcf/day. That said, adding back the same ‘distorting’ factors…to 2Q yields a relatively flat gas production trend from 1Q to 2Q of 2009. In other words, data from the publicly traded U.S. gas producers says gas supply ain’t falling very fast.”

The Raymond James compilation has a caveat, according to the analysts. The survey does not include private gas producer data, and this has “the potential for significant error since the smaller nonpublic players that we do not include in our production survey account for roughly 50% of total domestic gas production.”

However, “it has been our experience over the years (back-tested by lagging EIA data) that the production trends from private guys tends to mirror the public independents fairly closely,” said the trio.

“When push comes to shove over the next couple of months, and producers can’t push or shove any more gas into storage, we still believe that you’ll see natural gas prices fall below $3.00/Mcf,” wrote Freeman and his colleagues. “Unfortunately, it is going to become increasingly difficult to gain a true picture of underlying gas supply as gas producers are forced to shut in gas wells. Obviously, these shut-ins will skew the supply data even more as we move through the third quarter.”

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