Natural gas price hits 7-year low

Natural gas prices on the New York Mercantile Exchange dipped below the $3 US level on Thursday for the first time in seven years.

The September natural gas contract was trading at $2.94 US per thousand cubic feet inafternoon NYMEX trading down 18 cents from Wednesday's close. The front-month gas contract hasn't been that low since August 2002.

The drop followed the release of U.S. supply data that showed yet another increase in gas storage levels.The Energy Information Administration reported Thursday that the amount of gas stored underground in the U.S.grew by 52 billion cubic feetlast week to 3.2 trillion cubic feet. That's 19 per cent higher than the five-year average of gas storage levels.

In Calgary, the AECO-C one-month spot price tumbled 17.5 cents to $2.36, according to data from the NGX.

Natural gas prices have plunged by 80 per cent in the last year asbuoyant supplies and sluggish demand combined to create the most bearish market for gas in years.

Supplies have soared as the recession led industrial users to use a lot less power. At the same time, advances in exploration have made it economical to reach natural gas trapped in shale deposits gas that was previously too difficult or uneconomical to recover.

The oversupplyhas reached the point that analysts say many of the available gas storage facilities in North America are now almost full. In an average year, the facilities don't approach capacity until early fall.

Low prices have led to a 58 per cent drop in the number of rigs drilling for natural gas since last September.Some producers have scaled back exploration or production. Others now routinely hedge their gas production in an attempt to insulate themselves fromfuture price drops.

Analysts say prices could drop further

Even this summer's first tropical storms in the Atlanticfailed to boost prices as so much production has moved onshore. In the past, even the possibility that storms might develop into damaging hurricanes would cause prices to spike.

Analysis by the Energy Information Administration suggests that the ample storage and increased imports of liquefied natural gas from offshore could cause prices to"fall below current projections before space-heating demand picks up this winter and economic conditions improve."

The drop in gas prices, while good news for consumers, has dealt a big blow to the Alberta economy. Besides the thousands of layoffsamong producers and energy service companies, the Alberta treasury relies on gas royalties for a sizable portion ofprovincialrevenues.

In the 2008-09 fiscal year, Alberta took in $5.8 billion from gas royalties, more than triple what it got from oil royalties. Every 10-cent drop in gas prices costs the provincial treasury $126 million in lost revenue.