Natural-gas prices have had quite an unimpressive run in the last six months and the situation may get worse despite the steep declines in overall drilling and production. Futures prices for natural gas have been trading at their lowest levels since late 2002, most recently below $4 per million British-thermal-unit level on the New York Mercantile Exchange. It was a totally different story about a year ago, when cold weather drove prices to highs around $9. "High prices last year pushed U.S. exploration to record levels," said James Williams, an economist at WTRG Economics. "That increased production capacity." And the "high capacity, weaker demand due to recession and lower oil prices caused [natural gas] prices to collapse," he explained. Indeed, weak global economies are to blame, but only in part. The U.S. Energy Department expects the nation's natural-gas consumption to decline by 1.3% in 2009, according to the government's energy outlook report released last month. "There is plenty of gas available in the U.S. right now, as well as worldwide," said Charles Perry, president of energy-consulting firm Perry Management. "Supplies are plentiful and storage is high so there is little, if any, upside pressure on gas prices now." The recession's weakening demand and the drilling and exploration sectors are suffering from budget cuts, but technical advances in exploration and so-called unconventional resources are starting to pick up the slack. Never mind the fact that natural-gas consumption normally climbs during the summer as cooling demand starts to kick in. "Natural-gas storage levels are exiting heating season above the five-year average, while consumption is constrained by negative growth fundamentals in the broad market and industrial sector," Dan Payne, an analyst at Paradigm Capital, wrote in a recent note to clients. Shale to the rescue True, logic would lead the market to think that lower demand would undercut production and it has, but there are other sources of big supply available thanks to the industry's and U.S. government's efforts to boost energy output. "With the price collapse came another in drilling," said Williams. "Since something close to 25%-30% of U.S. production comes from wells drilled in the last 12 months, there is a possibility that depending on weather (hot summer/cold winter) we will need to import more for the winter of 2009-2010." The number of rigs running in the U.S. dropped to 1,039 for the week ended March 27, according to Baker Hughes . That's down 49% from the 2,031 level seen for the week of Sept. 12, 2008 -- the highest since 1980, Perry said. Over time, the market will lessen its reliance on Gulf of Mexico production, "which has a pretty rapid decline rate anyway, and producers aren't replacing those reserves due to the price decline," said Beth Sewell, a managing partner at Quantum Power & Gas Services. But there's an "incredible" amount of shale gas coming online and large supplies of liquefied natural gas will "definitely be an issue" until global demand picks back up, she said. "New natural-gas supply during the past two to three years has been an incredible success story, and almost all of the success can be attributed to new technology developed to drill and complete the tight shale formations that do contain natural gas," said Perry. Shale is a geologic formation, like a solid rock with microscopic holes in it, according to Perry. The most developed shale formation is the Barnett Shale in North Texas and it has thousands of new wells, he said.

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