Natural gas prices fell by more than 16 percent last week, settling on Friday at $3.63 per 1000 cubic feet, the lowest close since September 2002.  As the US economy contracts, the demand for natural gas has been dropping. Nearly 60 percent of US natural gas consumption is for industrial purposes or the generation of electricity. The EIA estimates that US industrial use of natural gas will be down by 5 percent this year and demand for electricity is at its lowest level since April 2006. US stores of natural gas rose by 3 billion cubic feet the week before last and now total 1.65 trillion, 20 percent above the five year average.

Drilling for more gas is falling rapidly. Last week the Baker-Hughes natural gas rig count fell to 810 rigs, down 50 percent from a high of 1,606 last September. Despite the rapid drop in drilling, US gas production is expected to be up in the first quarter and then slide later in the year. The production of gas from shale fields has dramatically increased US reserves. Some of the new fields and exploitation techniques have proven to be very productive; many of the new wells produce more gas faster, thereby offsetting the effects of reduced drilling.

The US gas glut is likely to be felt around the world in the form of lower prices for LNG. Japan reported last week that its LNG imports were down by 9.5 percent year over year in February. Last week Barclays Capital reported that its technical analysts expect that prices will continue to fall to around $3 per million BTUs, putting further pressure on drillers to cut back production.