Oct. 16 (Bloomberg) -- Natural gas futures in New York advanced for the third time in four days after a government report showed a smaller-than-forecast gain in U.S. storage.

Inventories rose 79 billion cubic feet in the week ended Oct. 10 to 3.277 trillion cubic feet, the U.S. Energy Department said in a report today. Thirteen of 17 analysts in a Bloomberg survey expected an increase of at least 80 billion cubic feet.

``The previous two weeks we've exceeded the estimate and we're under it today, so that's bullish,'' said Chris Jarvis, president of Caprock Risk Management LLC in Hampton Falls, New Hampshire. ``We're going into the heating season and it's very difficult to start shorting or selling gas ahead of that.''

Natural gas for November delivery rose 11.1 cents, or 1.7 percent, to settle at $6.703 per million British thermal units at 2:56 p.m. on the New York Mercantile Exchange. The heating and industrial fuel has gained 2.6 percent this week.

Exploration for gas may decline and lead to tighter supplies as companies either can't borrow or are reluctant to take on debt in the current credit crunch, Jarvis said.

The outlook for gas prices this winter is ``strikingly similar to the outlook the market had last year at this time,'' Arnie Quinn, a staff member of the Federal Energy Regulatory Commission, said at a meeting today in Washington. Supplies will be adequate to meet demand, the regulator said.

Prices in the 2007-2008 cold-weather season from Nov. 1 to March 31 advanced 21 percent and averaged $8.327 per million Btu, according to data compiled by Bloomberg.

``It seems to be people are of the view that you'll see pretty significant reductions in spending by exploration and production companies,'' said Tom Orr, research director at Weeden & Co. in Greenwich, Connecticut.

Production Costs

Gas produced from the Barnett Shale region of Texas, an area that has bolstered U.S. output, costs between $7 and $8 per million British thermal units to produce, according to analysts including Cameron Horwitz of SunTrust Robinson Humphrey in Houston.

``There's a lot of price support around the low $6.40 area and this is a market that doesn't want to break much further,'' Phil Flynn, senior trader at Alaron Trading Corp. in Chicago, said before the report. ``There's concern that if prices go much lower we'll see a dropoff in production.''

Costs to extract natural gas have risen and prices have fallen enough to prompt companies such as Chesapeake Energy Corp., the second-biggest U.S. independent natural gas producer, to reduce output, Flynn said.

Supply Forecast

Domestic gas output is expected to increase by 6.7 percent this year, particularly from fields in Texas and Wyoming, the Energy Department said in its monthly Short-Term Energy Outlook on Oct. 7.

``We look at $6.50 as a real trigger point because a fair amount of gas, perhaps 20 percent, becomes uneconomic,'' said Weeden's Orr.

Output from the Gulf of Mexico is still constrained after two hurricanes last month shut production platforms and pipelines.

About 37 percent of the Gulf's daily output of 7.4 billion cubic feet is shut because of the storms, a government report showed Oct. 14. The region accounts for about one-seventh of the country's gas production.

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

Last Updated: October 16, 2008 16:07 EDT