There are numerous reasons he could be getting an erection. He can't help how his body responds to certain stimulation so the cuddling might arouse him because you are stimulating the right places. You should respect what he says in regards to his sexual orientation. If you push the issue of him, possibly, being straight you are more likely to push him away. Be respectful to what he has communicated to you.

If I were to cuddle with my Gay friends and rub up against the right areas I am certain it would elicit a sexual response because we can't always control how our bodies respond to things like that.

As long as neither of you are uncomfortable with this response then you can continue to cuddle.

And, as stated it is possible your friend might decide he is no longer Gay but I am sure he has put a lot of thought behind his sexual orientation.