US gas futures up 3 pct early with weekday return

* Front month hovers near more than 2-week spot high

* Hot weather on tap in six to 10-day outlooks

* Recent storage builds falling well below average

* Coming Up: API oil data Tuesday, EIA oil data Wednesday

By Eileen Houlihan

NEW YORK, June 18 (Reuters) - U.S. natural gas futures rose
nearly 3 percent early Monday, boosted by the return of weekday
industrial demand and hotter weather on tap for much of the
nation in the coming days.

Nearby futures slid slightly on Friday after a huge
14-percent run up on Thursday, the biggest one-day gain in
nearly three years.

Weekly storage data last week showed a smaller-than-expected
build to inventories, forcing prices through key technical
resistance at the 40-day moving average in its wake.

While the tropical front remained fairly quiet, building
heat in the forecast and the recent trend in storage builds
falling below average for the past eight out of nine weeks had
traders cautious.

Front-month July natural gas futures on the New York
Mercantile Exchange were at $2.532 per million British
thermal units in early trading, up 6.5 cents, or nearly 3
percent.

On Friday the contract jumped as high as $2.557, the highest
mark for a front month contract since late May.

Futures hit a 3-1/2-month high of $2.759 in mid-May, but
many traders said the jump removed gas from favor over coal for
power generation.

But since posting a 10-year low of $1.902 twice in late
April, nearby futures are up more than 32 percent on signs that
record production was finally slowing and demand picking up as
more electric utilities switched from coal to gas.

LIGHT BUILD BUT STORAGE STILL AT RECORD

Last week's gas storage report from the U.S. Energy
Information Administration showed total domestic gas inventories
rose by 67 billion cubic feet to 2.944 trillion cubic feet.

The build fell short of a Reuters poll estimate of 74 bcf
and came in well below last year's gain of 72 bcf and the
five-year average increase for that week of 88 bcf.

Lagging stock builds this spring matched or fell below
seasonal norms in eight out of the past nine weeks, raising
expectations that record-high storage can be trimmed to more
manageable levels in the 22 weeks left before winter withdrawals
begin.

The weekly build trimmed the surplus to last year to 32
percent above the same week in 2011 and sliced the excess versus
the five-year average to 29 percent.

(Storage graphic: link.reuters.com/mup44s)

Concerns remain that the storage glut will drive prices
lower this summer as storage caverns fill. Inventories stand at
72 percent full, with producing-region stocks at 82 percent of
capacity.

The storage surplus to last year will have to be cut by at
least another 460 bcf to avoid breaching the government's
4.1-tcf estimate of capacity. Stocks peaked last year in
November at a record high of 3.852 tcf.

The EIA last week said it expected gas storage to climb to a
record 4.015 tcf by the end of October.

Early injection estimates for this week's EIA report range
from 47 bcf to 70 bcf versus last year's adjusted build of 90
bcf and a five-year average increase for that week of 87 bcf.

PRODUCTION GROWTH SLOWING, STILL RECORD OUTPUT

The EIA last week also trimmed its estimates for domestic
natural gas production and consumption growth in 2012.

Gas demand picked up sharply this year as spring prices hit
10-year lows, prompting some electric utilities to switch from
coal to cheaper gas for power generation.

EIA expects 2012 marketed gas production to average a record
high 68.47 bcf per day, up 3.4 percent from last year. But
demand in 2012, driven by strong gains in the electric power
sector, was expected to rise 4.1 percent.

Baker Hughes data on Friday showed the gas-directed rig
count fell to 562, its seventh drop in eight weeks and the
lowest level in nearly 13 years.

(Graphic: r.reuters.com/dyb62s)

The 40 percent drop in dry gas drilling in the last eight
months has raised expectations that producers were finally
getting serious about slowing record supplies.

The shift away from dry gas to higher-value shale oil and
shale gas liquid plays still produces plenty of associated gas
that ends up in the market after processing. That has slowed the
overall drop in dry gas output.

Traders noted recent declines in dry gas drilling and
planned output cuts by several producers seemed to be taking a
modest toll on gas production, but analysts say cuts so far of
about 1 bcf per day were not enough to significantly reduce
supplies.

MORE FUNDAMENTALS

The National Weather Service's six to 10-day outlook issued
on Sunday called for above-normal readings for most of the
nation, with below-normal readings along the West Coast and in
New England.

Nuclear power plant outages were running at about 9,100
megawatts, or 9 percent, on Monday, up from 8,200 MW out a year
ago and a five-year outage rate of just 5,600 MW.

The U.S. National Hurricane Center said a non-tropical low
pressure system northeast of Bermuda had a medium chance of
further development over the next 48 hours, but no other cyclone
formation was expected during the time frame. The Atlantic
hurricane season runs from June 1 through Nov. 30.

(Reporting by Eileen Houlihan;editing by Sofina Mirza-Reid)