HOUSTON (Dow Jones)--Natural gas futures finished slightly higher Tuesday amid signs that the fall-off in U.S. gas drilling is beginning to cut into supplies.

Natural gas for November delivery on the New York Mercantile Exchange settled 4.5 cents, or 0.93%, higher at $4.875 a million British thermal units. October gas futures expired Monday and settled at 3.730/MMBtu, while November - which is now the front-month natural gas futures contract - settled Monday at $4.83/MMBtu. November also marks the beginning of winter heating season, when demand for the fuel to heat homes and businesses picks up.

Jim Ritterbusch, president of the energy advisory firm Ritterbusch and Associates, said that the natural gas market appears to be tightening.

"The sub-surface dynamics in this market are shifting," Ritterbusch said, noting that the supply is moving in line with demand.

The U.S. Energy Information Administration reported Tuesday that gross natural gas production in the lower 48 states declined by 1.1% to 62.55 billion cubic feet a day in July from the previous month.

Traders and analysts have been monitoring the monthly production reports for signs that the brisk pullback in U.S. drilling activity is cutting into supplies.

David Pursell, an analyst with Houston-based investment firm Tudor Pickering Holt & Co., said that the report shows that onshore production is falling at a "healthy clip."

"I don't know any other way of looking at this report other than bullish," Pursell said.

The number of rigs drilling for natural gas in the U.S. stands at 710. The rig count has fallen by more than half over the last year.

Natural gas prices have faced pressure from swelling natural gas storage levels amid an economic downturn and mild summer weather that undermined demand for the fuel.

Storage levels for the week ended Sept. 18 stood at 3.525 trillion cubic feet and are expected to rise to record levels or even test capacity by the end of October, analysts said.


FUTURES SETTLEMENT NET CHANGE
Nymex Nov $4.875 +4.5c
Nymex Nov $5.674 +8.6c
Nymex Jan $5.954 +9.5c

CASH HUB RANGE PREVIOUS DAY
Henry Hub $3.22-$3.50 $3.42-$3.65
Transco 65 $3.46-$3.63 $3.45-$3.62
Tex East M3 $3.48-$3.62 $3.74-$3.82
Transco Z6 $3.46-$3.63 $3.70-$3.79
SoCal $3.52-$3.73 $3.66-$3.85
El Paso Perm $3.31-$3.40 $3.47-$3.60
El Paso SJ $3.22-$3.41 $3.49-$3.53
Waha $3.30-$3.46 $3.40-$3.62
Katy $3.26-$3.39 $3.46-$3.65

-By Jason Womack, Dow Jones Newswires; 713-547-9201; jason.womack@dowjones.com