TOKYO (MarketWatch) -- The natural-gas market has been struggling to lift itself back above prices traders hadn't seen in more than seven years, but the strategy among drillers to cut back on exploration and postpone new projects is finally starting to show signs of success as demand for the commodity begins to improve. Natural-gas prices were poised to end this week with a hefty gain, up almost 17% as of Thursday in New York, when they closed at $3.46 per million British thermal units. Front-month futures prices have rallied 38% from the low near $2.50 reached earlier this month, a level not seen since early 2002. "Low prices are curing low prices," said Ben Smith, president of First Enercast Financial, an information vendor serving energy markets.An oversupply of natural gas in the U.S. has been the key reason for weak prices and the market may soon see a record level in U.S. storage. U.S. supplies, at their current rate of increase, are "nearly certain" to exceed the all-time high of 3.7 trillion cubic feet seen in late October 2007, analysts at Deutsche Bank wrote in a research note issued last week. The Energy Information Administration expects inventories to reach 3.84 trillion around Oct. 31. Working gas in storage was pegged at 3.46 billion cubic feet as of Sept. 11, according to the EIA. "New, quick-draining shale plays have kept the supply of natural gas strong so far this year," said Smith, referring to natural gas produced from shale, a geologic formation. "Everyone is blaming fundamentals [for the low prices] and point to the large storage overhang, but the fundamentals have increasingly been more bullish in recent months," said Smith. "The natural-gas market has been working all year to correct itself by reducing rig count and shelving projects," he said.at on the back The hard work has hardly gone unnoticed in recent weeks. Today, there are half the rigs searching for natural gas in the U.S. than there were last year, said Smith. "The lower rate of exploration will eventually lead to lower U.S. production capacity," said James Williams, an economist at WTRG Economics, who expects supply and demand to come into balance sometime in the first half of 2010. As of Sept. 11, the number of oil and natural-gas rigs running in the U.S. was at 999, down 1,032 from a year earlier, according to Baker Hughes (BHI 40.78, +0.91, +2.28%) . At the international level, the rig count as of August 2009 was 947, down 140 from a year ago. Most of this drop was in the Barnett shale and other shale areas, according to Charles Perry, president of energy consulting firm Perry Management. The Barnett Shale in North Texas is the most developed shale formation. "Drilling and completion of wells in shale are extremely expensive, and when prices drop drastically, much of the shale drilling is no longer economical," said Perry. "On the other hand, since shale well production declines rapidly, and we are not drilling any replacement wells, this will hasten the time when we will loose excess supply," he said. In the meantime, industrial demand has picked up since bottoming this past May, according to Smith.

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