Natural gas prices have tumbled by about 30% this year, as a steep drop in industrial consumption has undermined demand. However, many of the traders and hedge funds that placed speculative bets on the price decline are beginning to reverse course and bet on a price spike, as dwindling production is starting to outpace slumping demand.

Traders trimmed their net short positions on gas by 11% to 114,064 in the week ended March 10, the smallest since last July, Bloomberg News reported. Also, natural gas futures for delivery in January 2010 are trading at a 49% premium to the April contract, which means speculators are anticipating a price surge.

In its short-term energy outlook – released on March 10 – the Energy Information Administration said that total natural gas consumption is projected to decline by 1.3% in 2009 and then increase by 0.4% in 2010. But many energy companies have idled rigs, scaling down production and increasing the chances of a supply crunch if the economy starts to recover.

Just as natural gas prices have plunged below $3.90 per million British thermal units (btu) from a record-high $13.694/btu on July 2, the number of natural gas exploration rigs in the United States has fallen to 884 from a record 1,606 in September, according to Baker Hughes Inc.

U.S. natural gas rigs fell 15% to an average 1,037 in February, their fifth consecutive monthly drop, Baker Hughes said.

With so many rigs coming offline, fourth-quarter gas production could decrease by 5.2%, Bloomberg reported. That would outpace the relatively acute decline in natural gas demand forecast by the Energy Department.

“When the recession ends and the economy starts booming, we’re going to have less natural gas than we do today and prices are going to spike back up,” said Larry Nichols, chief executive officer of Devon Energy Corp. (DVN). “The drop in supply will be so steep, it could easily catch up to where demand has dropped to before the recession ends.”

It’s also likely that more exploration projects will be shelved, and more rigs idled, as economic turbulence continues to linger. The cost of drilling and servicing is double what it was just four years ago, and in that time credit standards have tightened and the cost of borrowing money has increased substantially.

“When everybody sobers up after the first quarter and sees what their real cash flow is going to be, people are going to be very discouraged about how much capital they have to spend and that will depress the rig count even further,” G. Steven Farris, chairman and chief executive of the energy company Apache Corp. (APA), told The New York Times.

Theresa Gusman, head of equity research for Deutsche Bank AG’s (DB) DB Advisors unit, told Bloomberg that spending on U.S. exploration and production will drop an estimated 40% to $22.5 billion this year.

Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania is among the analysts who believe natural gas will soar back above $7/btu in the next 12 months.

“The next big move for gas is obviously going to be up,” said Schork. “If we are higher, I’d expect to see us at $7 by the start of next winter.”

Source: Natural Gas Prices Could Double as Energy Majors Scale Down Supplies

Schlumberger is pulling back as a collapse in petroleum prices led to a sharp drop in exploration spending by its customers.

Commodity prices have plummeted in recent months, as recessions in some of the world’s largest economies dampened demand. Like all oil producers, Schlumberger has been hurt by the plunge in the price of oil, which has fallen from $147 per barrel in July to about $42 per barrel now. The company has also seen its budget for exploration cut by 40%.

Schlumberger reported net profit of $1.15 billion, or 95 cents per share, down from $1.38 billion, or $1.12 per share, although revenue rose nearly 10% to $6.87 billion.

Schlumberger Chief Executive Officer Andrew Gould told investors on a conference call that the company was cutting 5,000 jobs out of 87,000 worldwide, and did not rule out more cuts in the first half of 2009, if necessary.

“It is a good sign that they’re coming front and center and acknowledging things have gotten a lot worse,” Mark Brown, an analyst at Pritchard Capital Partners in New York, told Bloomberg News. “We had to get this negative news out there.”

Schlumberger’s results echoed the sentiment of energy analysts who have forecast spending by oil and gas producers would drop by one-fifth or more in 2009 as companies move to conserve cash.

Spending by companies around the world on oil and natural gas exploration will fall to $400 billion in 2009, according to a Dec. 19 report by analysts James Crandell and James West of Barclays Capital Research.

The biggest decline in exploration spending is expected to come in North America, where U.S. spending will fall 26% to $79 billion and Canadian spending will slide 23% to $22 billion, Barclays said. By contrast, capital spending outside North America will fall only 6% to $300 billion.

“At current prices, most of the new categories of hydrocarbon resources are not economic to develop,” Gould said in the statement. “We expect 2009 activity to weaken across the board with the most significant declines occurring in North American gas drilling, Russian oil production enhancement and in mature offshore basins.”

Russia is part of Schlumberger’s largest regional market, which includes Europe and Africa.

In Canada, big producers like EnCana Corp. (ECA), Canadian Natural Resources and Husky Energy Inc. (PINK: HUSKF) have cut 25% to 30% from their capital budgets, according to Gary Leach, president of the Small Explorers and Producers Association of Canada.

“Right now it’s way cheaper to buy gas and oil on the market than to go drill for it,” Leach told the Calgary Herald.
But all those spending cuts may soon lead to a significant rebound in prices, Gould said.

Despite heavy spending by producers to develop new resources in recent years, the supply situation is still depressed and the cuts in investments hitting the industry now will “sow the seeds of strong rebound,” Gould said.

That seemed to be reflected in at least one of Schlumberger’s units.

Even though it posted a 68% drop in profit and a 25% drop in revenue in the quarter, Schlumberger’s WesternGeco seismic business – which measures prospective oil and gas reservoirs – is sitting on a record $1.77 billion order backlog.

And the gloomy earnings report from Schlumberger did nothing to dispel the notion among investors that oil prices will move higher.

“The fact that because this wasn’t the quarter that was prophesying the end of the world, it’s causing people to rethink their pessimism,” Bill Herbert an analyst at Simmons & Co. in Houstonsaid told Bloomberg. Indeed, oil services stocks rebounded in trading Friday.

Source: Schlumberger Sees End in Sight for Slumping Oil Prices