March 24 (Bloomberg) -- Natural gas futures rose to the highest in more than five weeks on speculation that declining exploration will cut supplies.

The number of gas rigs operating in the U.S. has fallen 47 percent to 857 from a peak of 1,606 in September, according to Baker Hughes Inc. The decline signals a 5.2 percent drop in gas output in the fourth quarter, Energy Department estimates show.

“It’s not an immediate need now, but it’s something that we’re going to have to keep an eye on,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “It’s moving closer to the front- burner in people’s minds.”

Natural gas for April delivery advanced 5.3 cents, or 1.2 percent, to settle at $4.347 per million British thermal units at 3:02 p.m. on the New York Mercantile Exchange. It was the highest closing price since Feb. 13. Gas futures have declined 24 percent this year.

Gas will average $6.84 per million Btu in the fourth quarter, according to a Bloomberg survey of 20 analysts. Prices may rise in 2010 to average $7.50 for the year.

Some investors are also closing out short positions, or bets that prices will fall, Beutel said.

“You’re going to see some short covering coming into this market anytime we get down on the price,” Beutel said. “We’re going to see it go through a period of two-way trading.”

Large speculators increased their net-short positions in gas futures by 1 percent to 115,187 contracts in the week ended March 17, Commodity Futures Trading Commission data show.

Factory Fuel Use

Demand for the fuel has been stifled by factory shutdowns and slowdowns during the recession. Output at factories, mines and utilities in the U.S. dropped 1.4 percent in February after a revised 1.9 percent decline in January, the Federal Reserve said March 16.

Natural gas producers responded to the slack demand by slashing output in an effort to stem the price declines. Chesapeake Energy Corp., the Oklahoma oil and gas producer that lost more than half of its market value last year, said March 3 that it cut oil and gas production by 7 percent after plunging prices made some wells unprofitable.

“Fundamentally, the only thing you’ve got to hang your hat on is the drastic cut in rig counts, if you’re a bull,” said Brad Florer, a trader at Kottke Associates Inc. in Louisville, Kentucky. “Technically, we were due for a bounce because the market had gotten pretty oversold.”

Technical traders watch for patterns on daily charts for clues to price direction, and will sell or buy based on those signals.

“The chart keeps its positive look for another day,” Michael Fitzpatrick, a vice president for energy at MF Global Ltd. in New York, wrote in report. Yesterday’s settlement above both the 10- and 40-day moving averages “makes an official reversal signal.”

To contact the reporter on this story: Mario Parker in Chicago at mparker22@bloomberg.net.

Last Updated: March 24, 2009 15:30 EDT