US publicly traded gas and oil companies showed a 2% year-over-year
increase in gas production in the third quarter, painting "a far more bearish
picture for the natural gas market" than has been the case in previous
quarters, analysts with Raymond James and Associates said Monday.

Sequentially, producers showed a 0.6% increase in production, the
analysts said.

Since its Q4 2006 production survey, Raymond James has seen a steady
moderation in year-over-year declines in US gas volumes, after adjusting for
the hurricanes that disrupted Gulf of Mexico production in 2005.

Nevertheless, while the year-over-year growth "is fairly modest given the
20% increase in the gas rig count over the past 24 months, it provides further
evidence for our cautious gas outlook for 2008, which is also bolstered by our
view that US liquefied natural gas imports will rise materially in 2008," the
analysts said.

Much of the incremental drilling activity came from unconventional plays
with high initial decline rates, such as the Barnett Shale, though
productivity from such plays is improving, the analysts said.

In addition, the recent start-up of Enterprise Products Partners'
Independence Hub in the Gulf is likely contributing to the production growth.
While that growth is likely to carry over into 2008, the analysts nevertheless
see a glimmer of hope for bulls over the longer term.

"As the decline rate treadmill for US gas production gets steeper, in
conjunction with a resumption in the downward trend in initial production
volumes from new wells, it should become exceedingly difficult to grow supply
without even greater increases in the rig count, and could make it nearly
impossible with slower growth in drilling activity," they said.

Moreover, despite the recent increase, production "is still down
meaningfully since what we believe was the peak in 2001." For the major
producers, year-over-year production fell 8.4%, the analysts said.