For months analyst have been looking for the massive drop in rig counts to result in a decrease in natural gas production in the U.S. According to the Energy Information Agency’s latest production report, this has finally happened. Production in the lower 48 states fell by 1.4 billion cubic feet per day in September.

This is a bit of good news for producers who have seen the price they get for natural gas crater over the past year to a seven year low. For consumers of natural gas and electricity this may be a sign that the market is coming back in to balance, and showing support around the $5 per MMBTU mark. Many commercial and industrial users will surely take a hard look at locking in electricity contracts now that we have seen hard evidence of a supply realignment.

Yesterday we saw the official end of hurricane season that came and went without a single interruption in the Gulf of Mexico. This, along with the industrial demand destruction due to the recession, and the mild winter to date has led some to predict another year of three to five dollar gas and low electricity rates.

So what will it take for prices to rebound? First, we absolutely have to see a colder than normal winter to draw down storage which currently sits 12% above the 5 year average. Second, we need to see improvements in the economy. Finally, we need to see a continuation of the drop in natural gas production. The next natural gas production report due out December 29th will be very telling, and will set the tone for 2010.