Just about everywhere one turns these days, there's a perception that natural gas and global oil supply are tighter than any analyst might have predicted last fall-and that for the foreseeable future, we're likely to witness strong commodity pricing and, in tandem, strong E&P stock performance. Take the domestic natural gas market. Recent Energy Information Administration (EIA) data suggest that U.S. onshore production is flat to down this year, observes Joseph Allman, E&P analyst for JPMorgan Securities Inc. in Houston. The cause: producers have been dropping rigs-this at a time when overall normal weather has increased demand versus last year. Indeed, between last November and late May 2007, the U.S. onshore rig count dipped from 1,651 to 1,540-a 7% drop. At first blush, this decline appears to defy conventional wisdom since commodity prices and E&P cash margins are strong. However, explains Allman, "all-in drillbit finding costs are still very high, making [upstream] economics tight. Given current costs, [producers] need close to $10 per million Btu Nymex gas prices to get adequate cash margins that provide sufficient rates of return on drilling." For more on this, see the July issue of Oil and Gas Investor. For a subscription, call 713-260-6441.