HOUSTON (Dow Jones)--Natural gas ended slightly higher Tuesday as traders bet on an economic recovery and a brighter demand outlook for the fuel, despite mild weather and swelling natural gas storage levels.

Natural gas for October delivery on the New York Mercantile Exchange settled 2.3 cents, or 0.70%, higher, at $3.32 a million British thermal units. The front-month contract climbed as high as $3.60/MMBtu in earlier trading - the highest in just over a month - then surrendered most of those gains.

Peter Beutel, president of the energy advisory firm Cameron Hanover, said the natural gas market was rallying on a combination of fresh buying and traders, who were betting that prices would fall, buying back previously sold contracts.

"We are now looking forward to a recovering economy, increasing demand and the impact of a lower rig count," Beutel said.

Natural gas prices have remained under pressure from rising natural gas storage levels and tepid demand resulting from the economic downturn. However, some analysts said that swelling storage levels, which are on pace to reach record levels before the winter heating season, have already been discounted by the market.

Analysts said that the brisk pullback in U.S. drilling activity will eventually bring supply in line with demand and help bolster natural gas prices when demand for the fuel improves. The number of rigs drilling for natural gas in the U.S. has fallen by more than half since this time last year as producers cope with natural gas prices that have fallen by about 75% since last summer, when prices peaked above $13/MMBtu.

Tim Evans, an analyst with Citi Futures Perspective, wrote in a note to clients Tuesday that the recent rally in natural gas prices is "in search of a reason, with no clear, agreed upon fundamental upward pressure on prices."

"We continue to think the rebound over the past two weeks represents a recognition that the downside potential had been exhausted on the move under $3.00, leaving prices undervalued," Evans wrote.

Natural gas prices slid to a seven-and-a-half-year low earlier this month, falling to an intraday low of $2.409/MMBtu on Sept. 4.

Forecasts for mild weather and the lack of storm threats to energy supplies from the U.S. Gulf of Mexico were putting pressure on prices Tuesday. The National Hurricane Center is tracking three tropical disturbances in the Atlantic. But none was expected Tuesday to go on and threaten the U.S. Gulf.

"Steering currents on deep Atlantic tropical activity will likely result in northerly turns far before reaching any North American concerns," meteorologists with the private forecasting firm Commodity Weather Group wrote in a note to clients on Tuesday.

The National Weather Service forecast for Sept. 20 to Sept. 24 calls for above-normal temperatures in the Northeast and parts of the Midwest. Below-normal temperatures are expected in the Southeast and in Texas.

Above-normal temperatures were not expected to spur additional demand for natural-gas-fired power for air conditioning because seasonal temperatures are becoming more moderate, analysts said.

   FUTURES         SETTLEMENT         NET CHANGE
   Nymex Oct         $3.320              +2.3c
   Nymex Nov         $4.301              -2.3c
   Nymex Dec         $4.961              -3.1c
   CASH HUB          RANGE              PREVIOUS DAY
   Henry Hub         $3.15-$3.39        $2.73-$3.03
   Transco 65        $3.15-$3.29        $2.76-$3.00
   Tex East M3       $3.44-$3.66        $2.99-$3.29
   Transco Z6        $3.15-$3.29        $2.99-$3.23
   SoCal             $3.39-$3.66        $3.00-$3.25
   El Paso Perm      $3.20-$3.33        $2.84-$3.00
   El Paso SJ        $3.24-$3.34        $2.82-$2.92
   Waha              $3.24-$3.32        $2.82-$3.00
   Katy              $3.10-$3.27        $2.80-$3.04