By Kristen Hays

Natural gas producers have been idling rigs for six months, trying to reduce output and boost prices that fell sharply amid bloated inventories and recession-shrunken demand.

That sweet spot remains elusive, despite a 56 percent reduction in the number of rigs drilling for natural gas, to 700 from the September peak of more than 1,600.

“It’s a self-correcting mechanism,” said David Pursell, an analyst with Tudor, Pickering, Holt & Co. Securities in Houston. “Prices go low, the rig count follows, and voila, production falls and the market fixes itself.”

But natural gas prices have largely lingered below $4 per million British thermal units since March after falling 78  percent from a high of more than $13 last summer.

Pursell said this down cycle has been more severe than is typical because the recession-fueled fall in demand followed rapid supply growth last year thanks to a boom in producing gas from thick shale rock. And inventories keep rising as producers have yet to dial down production enough to decrease underground stockpiles. Natural gas in storage reached 2.443 trillion cubic feet for the week ending June 5, the U.S. Energy Information Administration reported last Thursday, up from 2.337 trillion a week earlier and 1.875 trillion in early June last year.

The agency, an arm of the Department of Energy, also projected in its monthly short-term outlook that total natural gas consumption is projected to fall by 2.2 percent this year and then increase slightly in 2010.

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