The prospect of falling prices for natural gas may take some of steam out of a recent pickup in activity in drilling and oilfield services in Canada, a report by investment dealer Raymond James said Wednesday.

Demand for drilling services has been recovering after a drought of several years and peaked in mid-February with 71 per cent of the rig fleet active, analyst Andrew Bradford said in the report.

Falling natural gas prices could head off a recent pickup in drilling activity. (CBC)

Canadian natural gas exports amounted to $15.8 billion last year, making up 4.3 per cent of the country's total exports, Statistics Canada says.

Most companies are suggesting that their customers are booking work into the summer months.

"We haven't sensed this degree of optimism in at least three to four years," Bradford said.

"The competing issue is the elephant in the room," he said, and that is that prices for natural gas have been heading "sharply down" since early January.

Natural gas was trading in New York early in the afternoon at $4.30 US per million British Thermal Units, down four cents.

More gas has been pulled out of storage facilities in the U.S. this year than in all but one during the last decade, which is usually a sign that demand will be heading higher.

But Bradford said that withdrawal is due largely to the fact that this winter was one of the coldest in the last 10 years in the United States.

Competition from LNG imports increasing

Another issue that could cause a slowdown in the Canadian industry is what Bradford called the "ugly and omnipresent spectre" of increased imports to North America of liquefied natural gas (LNG) in tankers that would otherwise have carried their cargoes to Europe.

That could happen if European pricing dips too low in the summer and makes the North American market relatively attractive.

Unlike oil, natural gas has tended not to trade globally but the capacity to produce LNG worldwide is expected to increase by 27 per cent this year because companies have been investing in terminals to load and unload LNG.

While these threats exist for the drilling industry, said Bradford, they may not prove serious for three reasons:

Much of the gas exploration in Canada is being done by larger companies with the money to withstand low prices for a year or two; many of those companies have bought financial contracts that compensate them for a drop in the price of gas; and much of the rig fleet will be used to drill for oil, the price of which is higher and which would keep a lid on competition by service companies for contracts.