Setting aside the “near-term noise” in terms of North American natural gas fundamentals, prices should average below $4.00/Mcf this year, with summer contracts averaging around $3.25, Raymond James & Associates Inc. said last week.

Other energy analysts also weighed in, noting that despite a bullish speech by President Obama and new gas-related legislation, gas storage numbers and relatively strong January production data have cast a shadow over U.S. gas markets.

“Despite our expectations for a reduction in drilling activity, we still expect to see huge U.S. gas supply growth in 2011,” wrote Raymond James analyst J. Marshall Adkins and his team. “Specifically, we are modeling U.S. natural gas supply to increase, on average, 4-5 Bcf/d…for 2011. By the way, that means domestic production could very well climb above 70 (we repeat 70) Bcf/d this year.”

Even though the U.S. gas rig count has moved lower, the analysts said they believe four underlying supply trends are not being factored in by many of the “supply rollover pundits”:

“While it is clear that the natural gas rig count peaked (back in August) and is heading slowly lower, the discussion has now shifted toward gauging the impact to underlying U.S. supply,” wrote Adkins and his colleagues. “In our view, natural gas production will be up over 4 Bcf/d (or about 7%) in 2011 despite a 10% reduction in gas drilling activity.

“Does this sound vaguely familiar to the stance we took back in 2008 when the ‘industry pundits’ were calling for a sharp and massive rollover in production? Do we all remember how that one played out?”

The analysts noted that after the rig count peaked in August 2008, it fell by almost two-thirds (60%) before the U.S. gas supply finally “turned south as high-grading ran its course.” Even with the huge drop in drilling activity, the domestic gas supply fell only 2 Bcf/d (or 3%) peak-to-trough.

“This time, we are looking at a much more modest and gradual 10% reduction in drilling activity,” noted the analysts. “We once again believe the market is overestimating the impact of these modestly lower activity levels (or rather underestimating the resiliency of supply growth). All in, we see U.S. gas supply growth of 4-5 Bcf/d in 2011, which will likely weigh on U.S. natural gas pricing as we enter the summer.”

Deutsche Bank’s Adam Sieminski noted on Friday that the Energy Information Administration offered “another disappointing storage draw” for the week ending April 1, and has reported only a “slight decline in January 2011 wet gas output.” Both elements “continue to cast a shadow on U.S. gas markets,” he wrote.

The “slight drop” in gas output at the end of January “might appear to foreshadow the long-awaited slowdown in U.S. gas production,” but “the signal is weak,” said Sieminski. Gas drilling, he wrote, continues to be supported by at least six things: held-by-production leasing clauses, high natural gas liquids prices that provide incremental cash flow; joint ventures; forward sales; sales of existing leases to new owners; and the fact that some exploration and production companies want to maintain volumetric growth profiles.

“A seventh factor has been suggested by analysts at Bentek Energy,” he wrote, “that ‘over 2,800 natural gas wells [3 Bcf/d] in the Barnett, Haynesville, Eagle Ford, Granite Wash and Marcellus have been drilled but sit in nonproducing inventory.’ We believe many of these factors will start clear up by the end of 2011 and into 2012, but that continuing strong production could still weigh on gas prices in the near-term.”

Societe Generale (SG) U.S. gas analysts Laurent Key and Stephanie Aymes said the “real fundamentals buzz” for natural gas speculators “is all about growing future demand and declining future production.”

However, “as long as political inaction [in Washington, DC] continues to prevent any measure to control fracking [hydraulic fracturing] procedures, past experience suggests that the market may not be any tighter in four years,” wrote the duo. “Over the last three years the supply side has proven much more resilient to bearish price moves than the demand side to bullish ones.

“Price volatility might prevent utilities from replacing coal plants, since no producer is currently willing to provide a long-term, fixed-price contract for fear of losing out on profitable opportunities arising from…long-term speculation. Catch 22.”

The “drumbeat of change can be heard but is not likely to be seen for a while,” the SG analysts said of recent political events (see related stories). Although President Obama’s recent energy speech “seemed bullish amid rising future demand, it might actually be bearish — with new guaranties for natural gas producers.”

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