May 10 (Reuters) - U.S. energy firms this week cut the number of oil and natural gas rigs operating for a third week in a row, energy services firm Baker Hughes said in its closely followed report on Friday.

The oil and gas rig count, an early indicator of future output, fell by two to 603 in the week to May 10, the lowest since January 2022.

Baker Hughes said that puts the total rig count down 128, or 18% below this time last year.

Baker Hughes said oil rigs fell three to 496 this week, their lowest since November, while gas rigs rose one to 103.

The oil and gas rig count dropped about 20% in 2023 after rising by 33% in 2022 and 67% in 2021, due to a decline in oil and gas prices, higher labor and equipment costs from soaring inflation and as companies focused on paying down debt and boosting shareholder returns instead of raising output.

U.S. oil futures were up about 9% so far in 2024 after dropping by 11% in 2023. U.S. gas futures, meanwhile, were down about 10% so far in 2024 after plunging by 44% in 2023.

That increase in oil prices should encourage drillers to boost U.S. crude output. The government this week, however, slightly lowered its production outlook for this year to 13.2 million barrels per day (bpd), which is still up from the record 12.9 million in 2023. It forecast a slightly bigger 13.7 million bpd of output in 2025.

Occidental Petroleum said this week it expects to

increase oil production

in the Permian basin in the second half of 2024, with gains in efficiency allowing the company to reduce the rig count in the top U.S. oil field.

The drop in gas prices to 3-1/2-year lows in February and March has already caused several producers to slash spending and reduce drilling activities, which should cause U.S. gas output to drop to 103.0 billion cubic feet per day (bcfd) in 2024 from a record 103.8 bcfd in 2023, according to the EIA. (Reporting by Scott DiSavino Editing by Marguerita Choy)