Aug. 28 (Bloomberg) -- Natural gas plunged as much as 10 percent in New York, the most in a year, after U.S. supplies rose nearly twice the average for this time of year, easing concern a storm approaching the Gulf of Mexico will idle production.

Inventories advanced 102 billion cubic feet in the week ended Aug. 22, to 2.757 trillion cubic feet, the U.S. Energy Department said today, the largest increase since July 11. Tumbling gas prices caused oil to slip as much as $2.30 a barrel and halted a rally that began Aug. 26 amid concern Tropical Storm Gustav will become the strongest Gulf hurricane since Katrina idled almost all offshore output in 2005.

``This will put a bullet in gas prices for the rest of the year,'' said Martin King, an analyst at FirstEnergy Capital in Calgary. ``Barring disruptions from the storm, prices are headed for $6.''

Natural gas for October delivery fell 55.8 cents, or 6.5 percent, to settle at $8.05 per million British thermal units at 3:01 p.m. on the New York Mercantile Exchange.

Futures earlier fell 10.3 percent to $7.722, the biggest percentage decline since 13.8 percent on Aug. 20, 2007. Prices have slid 41 percent since closing at $13.577 on July 3, a 30- month high.

In cash markets, gas at the Henry Hub in Erath, Louisiana, fell 18 cents, or 2.1 percent, to $8.36 per million Btu. The hub is the benchmark U.S. pricing and delivery point for Nymex futures.

``That is a monster injection. Power generation demand has been weak and production keeps creeping into the system,'' said King. ``Gas supplies may end up higher than the 3.545 trillion cubic feet of last year.''

Oil Falls

Gas was trading near $8.52 and rose as much as 2.3 percent to $8.808 per million Btu on the approach of Gustav before release of the report at 10:35 a.m. in Washington.

Analysts expected stockpiles to increase 84 billion cubic feet, according to the median of 25 estimates compiled by Bloomberg. The average change for this time of year over the past five is an increase of 57 billion.

Gustav's maximum sustained winds increased to almost 70 miles (113 kilometers) per hour at 2 p.m. Miami time and are forecast to reach hurricane strength, 74 mph, today, the National Hurricane Center said. The system is 45 miles east of Kingston, Jamaica, and moving at 5 mph.

Crude oil for October delivery fell $2.56, or 2.2 percent, to settle at $115.59 a barrel in New York. Prices are up 61 percent from a year ago. Oil has dropped 20 percent from a record $147.27 a barrel reached on July 11.

Body Blow

``This is a body blow to the bulls,'' said Kyle Cooper, an analyst at IAF Advisors in Houston. ``Gustav doesn't appear to be much of a threat for lasting damage'' to Gulf production. ``It's going to disrupt some output as people are coming off the rigs, though it's unlikely to be a major catastrophe.''

In August and September 2005, U.S. crude oil and fuel production plunged and prices rose to records when hurricanes Katrina and Rita struck the Gulf Coast. Katrina closed 95 percent of offshore output in the region. Almost 19 percent of U.S. refining capacity was idled because of damage and blackouts caused by the storms.

Stockpiles are 71 billion cubic feet above the five-year average for this time of year, the department said today.

The injection is the largest ever for the same week of the year, based on department data dating to Dec. 1993.

Gas also declined as domestic production is expected to rise 8 percent this year on higher output from such fields as the Barnett Shale in Texas, the department said in its monthly Short- Term Energy Outlook on Aug. 12.

Surging Production

Production is surging as seasonal temperatures limit the need for gas to produce electricity to power air conditioners.

Gas is used to produce the ``vast majority'' of electricity needed when demand surges amid higher air-cooling needs, said Scott Hanold, an analyst at RBC Capital Markets in Minneapolis.

As the need for gas wanes, inventories build, Hanold said.

U.S. power-plant output decreased 3 percent to 83.5 million megawatt-hours in the week ended Aug. 21, according to an analysis by Genscape Inc. Power demand is 5.5 percent less than a year earlier, Genscape said.

The storage gain ``is one of the biggest surprises we've had in some time,'' said Brad Florer, a trader at Kottke Associates Inc. in Louisville, Kentucky. ``Everybody who was preparing for a hurricane got trucked.''

To contact the reporters on this story: Reg Curren in Calgary at rcurren@bloomberg.net.

Last Updated: August 28, 2008 15:36 EDT