After touching a 2009 high of 514 on Tuesday, the index of major natural gas producers (XNG 495.52, -8.28, -1.64%) has fallen below 500 in the last two days, and may move lower on Friday. It's still up about 25% for the year, outperforming the S&P 500 since July. The recovery in stock prices had come on hopes for 2010 because producers have drastically scaled back their drilling operations and cut the cost of getting natural gas out of the ground.The likes of Apache Corp. (APA 92.84, +1.32, +1.44%) , Devon (DVN 67.43, -0.44, -0.65%) , EOG Resources (EOG 80.58, +0.53, +0.66%) , XTO Energy (XTO 41.15, -0.64, -1.53%) ,Chesapeake Energy (CHK 27.30, -0.52, -1.87%) hope for prices in the range of $6 to $7 per thousand British thermal units in order to generate double-digit returns in 2010, according to some estimates. But prices still remain under $4 per British thermal unit for now, and appear to be headed lower, as U.S. stockpiles grow to record levels. Energy research specialists at Morgan Stanley cast a strong note of caution this week, while forecasting a healthier average natural gas price of $6.50 per BTU next year. While noting that a cyclical recovery remains intact in the coming months, prices may disappoint after a trough in the third quarter of this year, analysts said. "We believe balancing of the natural gas market in 2010 remains an investable theme," analyst Stephen Richardson said in a note to clients on Wednesday, while upgrading Apache Corp. to overweight and downgrading Bill Barrett (BBG 31.68, -0.97, -2.97%) to underweight. Looking ahead, Richardson said once production declines are established and supply tightens, "we look for a six-to nine-month upcycle in prices to encourage increased activity in the natural gas upstream." While oil prices bottomed below $40 a barrel in December and climbed back to the $70 range now, natural gas prices remained depressed until Sept. 3, when they hit a seven-year low. From there, natural gas prices have rallied about 50%.

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