April 23 (Bloomberg) -- Natural gas futures fell to the lowest in more than six years after a government report showed an above-average gain in U.S. inventories amid weakening demand during the recession.

Stockpiles increased 46 billion cubic feet in the week ended April 17 to 1.741 trillion cubic feet, the Energy Department said. The average gain for the week over the past five years is 35 billion. Supplies were 23 percent higher than the five-year average, today’s report showed.

“The biggest unknown is industrial demand and its weakness,” said Cameron Horwitz, an analyst at SunTrust Robinson Humphrey Inc. in Houston. “People assumed industrial demand had bottomed in January and we’d stair-step our way back to a normal level, and what seems to be showing up is that it’s not. It’s not getting worse, but it’s not getting better.”

Natural gas for May delivery fell 12.3 cents, or 3.5 percent, to settle at $3.409 per million British thermal units at 3:04 p.m. on the New York Mercantile Exchange, the lowest closing price since Sept. 12, 2002. Gas has declined 39 percent this year.

Analysts had expected a supply increase of 45 billion cubic feet. Estimates ranged between gains of 29 billion and 52 billion cubic feet.

Gas consumption by factories may drop 7.4 percent this year as the recession cuts demand, the Energy Department said in a report on April 14.

Factory Use

The decline in industrial usage is about 2 billion cubic feet a day lower through the first quarter compared with the same period a year earlier, Horwitz said.

General Motors Corp. said it will idle 13 assembly plants for multiple weeks as the company attempts to reduce inventory after a 49 percent decline in U.S. vehicle sales this year.

The slowdown in the U.S. economy has cut demand for gas as a fuel to run factories and as a feedstock to make chemicals, plastics and produce building materials like steel after consumers reduced purchases amid rising unemployment.

The U.S. economy will contract 2.8 percent this year, the International Monetary Fund said yesterday.

Gas supplies are showing no sign of diminishing at a time when consumption is weak because of the end of the peak winter heating period and a slack economy, said Tom Orr, research director at Weeden & Co., a brokerage in Greenwich, Connecticut.

“We’re going lower,” said Orr. “I’m not going to pretend to say I know where the bottom is. The trend has been lower and lower and there’s no reason to think that’s stopping right away.”

Technical Support

Gas prices are slicing through previous areas of technical support, adding pressure to the down side, he said.

“We’ve taken out $3.40, which is a technical level, so the next is $3.10,” said Orr, who signaled the move lower on April 16. “It’s inevitable now; there’s no technical support.”

Should gas breach $3.10, Orr anticipates a move lower to $2.64, last reached on Aug. 7, 2002.

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

A decline in drilling activity in the U.S. has yet to slow supplies getting to market and is adding to the current glut, said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Cannan, Connecticut.

“The decline in supplies isn’t going to show up for some time,” he said. “We won’t see this decline for six to 18 months.”

Total marketed U.S. production rose 7.2 percent to 21.5 trillion cubic feet in 2008, while consumption gained 0.8 percent, according to the Energy Department.

The number of onshore gas rigs seeking new deposits in the U.S. has dropped 53 percent since September as prices collapsed.

Natural-gas rigs operating in the U.S. last week fell by 30, or 3.8 percent, to 760, the lowest since the week ended March 14, 2003, according to data compiled by Baker Hughes Inc. The count is down from a peak of 1,606 on Sept. 12.

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

Last Updated: April 23, 2009 15:34 EDT