Nov. 6 (Bloomberg) -- Natural gas declined in New York on concern there will be a slow recovery in fuel demand, after a government report showed U.S. unemployment topped 10 percent.

Futures had rallied in the past two months partly on speculation that the economy was improving enough to boost industrial demand, which accounts for 29 percent of gas use. The unemployment rate rose to a 26-year high as employers cut more jobs than forecast, according to Labor Department data.

“Gas is getting hammered because the job report spooked people,” said Tom Orr, director of research at Weeden & Co., a brokerage based in Greenwich, Connecticut. “There’s plenty of gas, so the price is going to go lower.”

Gas for December delivery fell 18.7 cents, or 3.9 percent, to settle at $4.595 per million British thermal units at 2:50 p.m. on the New York Mercantile Exchange. Gas dropped 8.9 percent this week and is down 18 percent this year.

Natural gas inventories rose 29 billion cubic feet in the week ended Oct. 30 to 3.788 trillion cubic feet, reaching an all-time high for the sixth straight week, an Energy Department report yesterday showed. The record before this year was 3.545 trillion cubic feet reached on Nov. 2, 2007.

“Storage and the weather are the major concerns,” Michael Fitzpatrick, vice president of energy with MF Global in New York, said in a note to clients. “Winter cold is lagging the calendar in parts of the country and storage is approaching capacity.”

Near Capacity

Storage sites are now at 97 percent of peak capacity, which the Energy Department estimates at about 3.9 trillion cubic feet. Inventories will probably begin declining later this month as heating-fuel demand increases.

Forecasts of mild weather in the coming weeks have also weighed on prices as the U.S. heating season gets off to a slow start, said Carl Neill, an energy analyst at Risk Management Inc. in Chicago.

“With as much gas as we have in storage right now, we obviously need a very cold winter to help alleviate” the supply glut, he said. “We’re just popping through support levels, $4.70 was one and now we’re under that. This may sell off now to the September lows around $4.34.”

Above-normal temperatures will cover most of the U.S. Nov. 11 through Nov. 15, according to MDA Federal Inc.’s EarthSat Energy Weather in Rockville, Maryland. About 52 percent of U.S. households use gas as a furnace fuel.

The mild trend will probably persist through Nov. 20, EarthSat Energy said in its 11-to-15-day forecast.

Prices in the range of $4 per million Btu “make sense because that’s what the cash market is telling you,” said Neill.

The wholesale price at the Henry Hub in Erath, Louisiana, the benchmark for U.S. futures, fell 8.2 percent to $3.9453 per million Btu today, according to data compiled by Bloomberg.

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

Last Updated: November 6, 2009 15:45 EST