NEW YORK (Dow Jones)--Natural-gas futures settled higher Friday as traders covered short positions and bargain-hunted ahead of the holiday weekend.

Natural gas for October delivery on the New York Mercantile Exchange settled 22 cents, or 8.77%, higher at $2.728 a million British thermal units. Prices reached as high as $2.74/MMBtu in combined floor and electronic trading.

Driving the upward price move was traders squaring their books ahead of the Labor Day holiday weekend in the U.S. A downward move in prices through much of the week allowed traders with short positions to take profits.

At the same time, traders didn't want to be caught with short positions ahead of the three-day weekend, especially during hurricane season. A storm can shut in and damage gas-production facilities in the U.S. Gulf of Mexico, pushing prices higher. However, forecasts show little tropical activity at this time.

"It is purely indicative of financial short covering," said Art Gelber of Houston-based Gelber and Associates.

Market conditions remain challenging for a sustained rebound in prices amid strong supplies, slumping industrial demand and mild temperatures. U.S. natural gas inventories are expected to reach maximum storage capacity before the winter.

Nothing in the near-term supports prices, although some buying from investors interested in entering the market at the current low levels may be providing a boost, said Mike Fitzpatrick, a broker with MF Global in New York.

Low prices brought an announcement from Ontario-based producer Epsilon Energy Ltd. (EPSEF) Friday that it is slashing natural gas production by 44%. The company said it has shut in one well in Pennsylvania's Marcellus Shale gas field and has curtailed production from a second well.

However, drilling rig counts in the U.S. continue to creep up slightly. Oil-field services company Baker Hughes Inc. (BHI) reported Friday the number of gas rigs was 701, an increase of two rigs from last week. Producers have scaled back gas-drilling rigs, which peaked at 1,606 in September, but some have brought them back on line amid signs of an economic recovery.

-By Mark Peters, Dow Jones Newswires; 212-416-2457;