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Natural Gas Domestic Rig Count Drops to Six-Year Low

Low natural gas prices and the depressed global economy continued to pressure U.S. natural gas producers to rein in operations, according to a recent report from Baker Hughes, which showed that the number of rigs actively searching for gas within the United States during the week ending April 17 dropped by 30 to 760, a level of activity not seen in more than six years.

Downward-spiraling natural gas prices, tight credit markets and the overall sour economy has had producers cutting their activities over the last number of months. The count of rigs searching for natural gas in the country has dropped 53% since September 2008's peak of 1,606. The last time fewer rigs were searching for gas domestically was for the week ending March 14, 2003, when 754 rigs were operating.

Unsurprisingly, with natural gas rig levels currently at more than six-year lows, so to are natural gas futures prices. Front-month natural gas futures put in a low of $3.504 on April 13. The prompt-month contract has not traded lower since September 2002. Friday's $3.729 close for May natural gas is 72% lower than last summer's $13.694 peak for front month futures.

Natural gas prices, production and demand are expected to continue on a downward spiral through the rest of the year and possibly pick up in 2010 if the economy recovers, the Energy Information Administration (EIA) said in its recently released Short-Term Energy and Summer Fuels Outlook (see related story).

"The precipitous drop in drilling activity and declining productivity of wells already in place are expected to cause production to steadily decline as the year progresses," the government agency said in its outlook. "The resultant impact of lower production in the Lower 48 non-Gulf of Mexico during the second half of [this year] is expected to more than offset higher year-over-year production during the first half of the year. Additional supply curtailments may be necessary as natural gas storage levels approach capacity later this summer."

Despite the plummeting rig count, natural gas prices have not shown any signs of firmness and are not expected to anytime soon according to traders. "Producers are cutting back production, but it could be some time until we see the ramifications of that" in natural gas futures, said Ed Kennedy, a broker with Hencorp Becstone Futures LC in Miami.

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