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.
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.
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)
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