By Myra P. Saefong

TOKYO (Dow Jones) -- 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 (BHI). 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.

That shale formation has produced 4.8 trillion cubic feet of natural gas and is expected to produce an additional 40 trillion of natural-gas resources, according to Chesapeake Energy (CHK), which pegs itself as the largest U.S. producer of natural gas.

And there are many other shale formations in different stages of development, said Perry.

"The point of all this is that there now appears to be enough new undeveloped domestic gas reserves in these shale formations to supply the U.S. for many years to come," he said.

Terrible timing

Then there's liquefied natural gas, which is expected to downright flood the market as investment in the global infrastructure for the fuel over the past several years reaches its goal.

This year's expected to see massive amounts of LNG from big overseas producers such as Algeria, Australia, Indonesia, Nigeria, Oman, Qatar and Russia, as well as Trinidad and Tobago.

Many of the producing countries are emerging third-world countries "who desperately need the cash so they'll produce and ship no matter what the price is," Sewell said.

"The U.S. has, by far, the greatest storage capacity for LNG in the world," said Perry. "So as LNG is shipped, if it has no where else to go, it will end up going to the U.S. and the shippers will take almost any price offered because they have to get it unloaded as soon as possible before it all boils off."

That doesn't bode well for a market that's already bogged down by hefty natural-gas supplies.

"We are ending the traditional [supply] withdrawal season with a tremendous inventory," said Sewell. U.S. supplies of the commodity in storage were running about 29% above the year-ago level, as of the week ended March 20, according to the Energy Department.

"Until some of that [supply] is worked off, prices will remain under pressure," said WTRG's Williams.

Futures peaked at $13.58 in early July of last year, but they will probably range between $3 and $4 through this summer, he said.

And most analysts predict that, "given the big cushion of storage gas and still-weak demand, even a major hurricane disruption is unlikely to cause a huge spike in prices as it has in the past," said Mark Davidson, editorial director of U.S. Gas News at Platts. Natural-gas prices spiked to record highs near $16 in 2005, in the aftermath of Atlantic Hurricanes Katrina and Rita.

Overall, the general consensus among industry analysts, officials and traders is that the days of $15 per million British-thermal-unit gas, or even $10 gas, are "long gone -- at least for the foreseeable future," said Davidson.