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Page 2 of 2 Production Cuts Suppliers are already trying to scale back production, but run into similar problems that OPEC and other oil producers encounter when cutting production - the cuts take a while to flow through the system and affect prices. One way to look at how much suppliers are cutting is to look at the number of rigs that are in service. The latest numbers from the EIA weekly Natural Gas report show that the number of natural gas rigs for the week of Feb. 27 fell down to 970, from 1,018 the week before. Last year at this time, there were 1,418 rigs working. The highest number of rigs working on record was 1,606 on Sept. 12, 2008. The EIA has this handy chart that shows the relationship between the number of rigs and natural gas' spot price: 
As you can see, the number of gas rigs had been growing slowly and fairly steadily over the past five years until September, and then they started dropping. This was about a couple of months after July's high prices and the subsequent crash of the commodity market. The number of rigs started dropping pretty quickly once the price started falling, but not as quickly as the price did. Now we are at a point where suppliers, such as Chesapeake Energy, are continuing to cut production, because the price is so low that many cannot cover their costs. "During March 2009, most Mid-Continent natural gas prices at major interstate pipeline delivery points will average around $2.70 per thousand cubic feet, a price at which most natural gas production is unprofitable," said Chesapeake's Chief Executive Aubrey McClendon. What Does That Mean For The Future? Well, for one thing - the independents may be harder hit than the big boys like BP. As Ben Casselman with the Wall Street Journal noted on the publication's Environmental Capital blog: "When prices were rising, it was the fast-moving, free-spending independents that had the edge. Now that cash is tight, the more conservative, cash-hoarding majors are better positioned to ride out the storm." On a positive note, due to the natural gas markets' geographical differences, things are not bad all over for the independents - at least not yet. Areas like western Pennsylvania are still seeing new well development. As the Pittsburgh Tribune-Review reported, some companies are still able to continue to drill: "Many companies have contract commitments which have to be met, and internal cash flows still allow wells to be drilled," said Steve Rhoads, president of the Pennsylvania Oil & Gas Association. "As long as there is access to capital, drilling will continue." If natural gas prices drop further, into the $3 per thousand cubic feet range, there could be a significant drop in drilling statewide, he said. But if prices continue to remain low, even BP with its deep pockets won't be able to continue pumping. Add to that the reduction of investment, development and the drilling of new wells, and it looks like we've got a supply shock in the making. It will only be a matter of time.
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