?Calling the turn in this energy down-cycle is as tough as calling the surprise winner of last month’s Kentucky Derby, which turned out to be an ultra-long-shot dark horse that surged from dead last to finish first—and not only that, but by a record-setting length.

The economic outlook is muddy right now, just like that track at Churchill Downs.

Since the stock and commodity markets bottomed in March, energy analysts, economists and the Fed have been calling for an upturn by year-end, or certainly sometime in first-half 2010.

Low natural gas rig counts and falling gas production are setting us up for the next upswing, and it’s only a matter of time. And if the U.S. recession is over by year-end, an economic upturn in 2010 could propel energy use upward shortly thereafter.

But is this a false dawn?

For now, it appears the world economy is not going from good to great. Instead it is going from awful to slightly less awful. The pace of growth in unemployment is not quite as bad as it was. The 19 biggest U.S. banks more or less passed their stress test in May, but they were told, like so many baby boomers, to lose weight and eat more veggies.

Toyota had a $7.7-billion loss in the first quarter and Chrysler fell into bankruptcy. But at the same time, the Institute for Supply Management’s manufacturing index has been rising for four months, signaling that economic expansion might be right over the horizon.

Barclays Capital’s U.S. economic researcher, Ethan Harris, said in May that the economy is in the early stages of a turn for the better.

In the oil patch, too, there are many mixed signals.

In the first quarter, the rig count plunged. Schlumberger, Halliburton, Rowan Cos., Cameron International Corp. and other service companies laid off some employees and took charges to cover job cuts. Many E&Ps took big write-downs in the value of their reserves, leading to huge first-quarter losses.

About the time the financial reporting season was ending, however, commodity prices began to recover, rising to $4 for gas and $58 for oil—even as U.S. oil and gasoline consumption continued to fall to decade-lows.

So, where do we stand? Take a look at Texas, whose drilling and production activity makes up about half of the U.S. total. Lone Star drilling continued to decline throughout April for the sixth consecutive month, according to the Texas PetroIndex (TPI), “sustaining a trend that could lead to severe job losses, diminished supplies of oil and gas, and, ultimately, skyrocketing energy prices,” said Karr Ingham, the West Texas economist who created the TPI as a service of the Texas Alliance of Energy Producers.
“…deep negatives in oil and gas wellhead prices, the rig count, drilling permits, and production values suggest that the current recessionary trend will continue to pick up steam in the coming months,” he said a month ago. Ingham predicted this “places recovery well into 2010, even assuming a rebound in the U.S. economy later this year and the resulting increase in demand for energy products.”

I am not sure the length of previous downturns is instructive, because macro conditions vary so much by year. But the first Texas oil and gas industry crash recorded by the TPI lasted 19 months, from November 1997 through June 1999, Ingham says. The second downturn lasted about a year, from August 2001 until August 2002.

What about the production response? Texas produced about 619 billion cubic feet of natural gas in March, a 1.9% decline compared to the March 2008 estimate (perhaps an unfair comparison in that production then was up by more than 10% compared to 2007 as the Barnett shale surged).

What of the future? The Texas Railroad Commission says drilling permits are off. Through March, it had issued 3,240 permits, down from 5,440 by March 2008. The 1,264 permits issued in January, 943 in February, and 1,033 in March were down 28.2%, 51% and 41.1%, respectively, from the like months of 2008.

So, many big questions remain. When does U.S. gas production roll over—and by how much—thanks to a slower drilling pace, decline curves and well shut-ins? How much liquefied natural gas will land here in the next few months, and what will that do to wellhead prices?

We have dedicated most of this issue to these natural gas topics and spoken to numerous energy experts. There is some consensus, but there are some contrarians too. Everyone is waiting for $7 gas to return.

We are pleased to announce the seven winners of the 2008 Oil and Gas Investor Excellence Awards in this issue (see page 17). We already wrote earlier this year about some of their outstanding activities, and we’ll bring you more information about them subsequently. Congratulations to all.