HOUSTON (Dow Jones)--Natural gas futures ended lower Friday as mild weather and tepid demand weighed on the market.

Natural gas for October delivery on the New York Mercantile Exchange settled 17.3 cents, or 5.40%, lower at $3.033 a million British thermal units. Friday marked the first day of front-month trading for the October futures contract. The September futures contract settled Thursday at $2.843/MMBtu, while October settled Thursday at $3.206/MMBtu.

The October contract was trading above $3/MMBtu Friday and above Thursday's front-month settlement price. But that price gap narrowed as prices faced pressure from swelling natural gas storage levels, diminished demand resulting from the economic downturn and a mild weather outlook. October futures sank as low as $3.02/MMBtu in earlier trading.

"You have seriously constricted demand and storage is brimming," said Mike Fitzpatrick, an analyst with MF Global in New York.

Natural gas prices have declined more than 75% from their highs last summer of above $13/MMBtu as falling industrial demand for the fuel coupled with booming onshore U.S. gas production have put natural gas stocks on pace to reach record levels before the winter heating season begins. Weather forecasts are also expected to stifle demand for natural gas-fired power to cool homes and businesses and help bolster storage injections in the coming weeks.

Natural gas in U.S. storage for the week ended Aug. 21 stood at 3.258 trillion cubic feet - 19% higher than last year and 18% above the five year average.

Domestic drilling activity, which had been on the decline, has shown gradual increases over the last several weeks as natural gas producers put some rigs back to work.

The number of rigs drilling for natural gas in the U.S. edged up to 699, an increase of four rigs, according to oilfield services company Baker Hughes Inc. The natural gas rig count is still down by more than half since peaking in September at 1,606 rigs. But the rig count has increased by 34 rigs over the last six weeks.

Cameron Horwitz, an analyst with SunTrust Robinson Humphrey in Houston, said the rig count seems to have reached a bottom and that producers were drilling in some areas where companies could achieve profits "even at these low gas prices."

The National Weather Service forecast for Sept. 2 to Sept. 6 calls for near-normal temperatures across the Northeast and in parts of the Midwest. Below normal temperatures are expected across the Southeast.

Forecasters were also tracking a tropical disturbance about 900 miles west-southwest of the southern Cape Verde Islands, according to the National Hurricane Center. The storm has a 30% to 50% chance of becoming a tropical cyclone.

However, weather models predict the storm won't threaten the energy-rich Gulf of Mexico. The weather system, which could intensify this weekend, is expected to remain at sea or deteriorate as it encounters increased wind shear, private forecasters said.


FUTURES SETTLEMENT NET CHANGE
Nymex Oct $3.033 -17.3c
Nymex Nov $4.053 -13.6c
Nymex Dec $4.913 -13.4c

CASH HUB RANGE PREVIOUS DAY
Henry Hub $2.39-$2.65 $2.65-$2.79
Transco 65 $2.36-$2.56 $2.60-$2.81
Tex East M3 $2.56-$2.72 $2.83-$3.02
Transco Z6 $2.54-$2.72 $2.80-$3.04
SoCal $2.53-$2.71 $2.70-$2.82
El Paso Perm $2.40-$2.53 $2.60-$2.70
El Paso SJ $2.37-$2.48 $2.50-$2.61
Waha $2.45-$2.58 $2.68-$2.73
Katy $2.36-$2.59 $2.60-$2.76


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