While the onshore drilling rig count remains an important driver of gas supply, the picture has become muddied over the past two or three years by the accelerating shift from vertical to horizontal drilling. The sharp drop in the onshore rig count since September 2008, when the rig count dropped from a peak of 1,606 gas land rigs to a trough of 665 rigs in August 2009, contributed to a slowdown in the growth of onshore production, but has so far failed to cause a decline. Why is this? Firstly, the rig count has recovered somewhat - it is now back to 934 at the end of October. Secondly, the composition of the rig count has changed, with a shift to more powerful 'premium' rigs, some capable of doing twice the work of a smaller 'conventional' rig. Hence, a lower rig count today is producing more gas than a higher rig count in 2008.

As a result, onshore supply has continued to rise and is now around 13% above the peak in 2008 before the rig count collapsed. But, as we mentioned earlier, we do not believe this growing excess in production over demand can continue indefinitely with natural gas trading well below the marginal cost of supply: either capital spending by the exploration companies will be reduced, lowering production, or natural gas demand stimulated by the low gas price will move up to rebalance the market.

Eoin Treacy's view Low US natural gas prices represent an anomaly in the energy sector where just about all other energy commodity prices are well above their long-term averages. The USA's particular situation, where massive unconventional supply is swiftly being brought to market, has resulted in prices falling to uneconomic levels. As with any supply driven environment, prices will fall to a level where demand is attracted to the market and supply is deterred.

Prices in the region of $3.50 represent uneconomic levels for just about all unconventional supply. Some companies feel compelled to drill because their permits are close to expiry. However, that is not a sustainable business model. Concurrently, such low absolute and relative gas prices will eventually encourage new sources of demand.

Power companies as well as industrial user such as chemical and fertiliser companies are all potential beneficiaries of lower gas prices. Consumers and companies that migrate to lower cost energy systems such as CNG vehicles should also benefit.