UPDATE 3-US July gas futures off highs but expire with gains

* Front-month gas hits highest mark since mid-January

* Broad-based heat stirs cooling load, drives gains

* Storm Debby cuts some production, dampens Southeast demand

* Coming Up: EIA, Enerdata natgas storage data Thursday

(Releads, adds quote, spread data, updates closing prices)

By Joe Silha

NEW YORK, June 27 (Reuters) - U.S. natural gas futures ended
higher on Wednesday for a fifth straight session, with warm U.S.
forecasts for the next two weeks driving July to a 5-1/2 month
high before profit-taking brought the contract off the intraday
high ahead of expiration.

Gas prices have shot up more than 10 percent in the last
five sessions. Heat has been the main factor driving prices
higher this month in what has turned out to be a very warm,
early start to the summer cooling season.

Private forecaster MDA EarthSat still expects widespread
heat to blanket much of the United States for the next two
weeks, with only some New England and West Coast states likely
to see seasonal temperatures.

Concerns that Tropical Storm Debby had disrupted gas
supplies also triggered buying early in the week, but the
storm's impact on Gulf of Mexico gas production was minimal.
Less than 5 billion cubic feet of output has been shut in since
Friday, with no reports of serious damage to offshore producing
facilities.

"The market rallied hard today, then sold off into the close
on some profit taking. I think prices got a little overbought at
higher levels," a New England-based trader said.

The front-month July gas futures contract on the New
York Mercantile Exchange expired up 0.7 cent at $2.774 per
million British thermal units after climbing early to $2.946,
the highest for a nearby contract since mid-January.

Relative strength in the near contract narrowed spreads to
winter for the fourth time in five sessions, with the December
premium to July ending at 55.7 cents, down 3.3 cents from
Tuesday and 35 percent below its peak this year of 86.1 cents
set in mid-April.

While chart traders noted that Wednesday's run up drove the
front month above the 200-day moving average for the first time
in 11 months and could be viewed as bullish, some said
Wednesday's relatively weak close could keep buyers cautious.

Strong utility demand for gas this year has helped tighten a
loose supply-demand balance, as decade-low prices prompted some
utilities to burn cheap gas rather than coal to generate power.

It has also helped slow weekly inventory builds to below
average for eight straight weeks and pulled a huge stock surplus
to last year down 23 percent from late-March highs.

But fundamental traders said as gas prices approach the $3
mark, utilities could start using more coal to generate power.
They noted the NYMEX eastern coal to Henry Hub gas spread this
week was pared to its narrowest in nearly a year, dipping below
$1.10 per mmBtu (gas premium).

The spread does not include transportation costs.

MORE LIGHT STORAGE BUILDS AHEAD

Traders and analysts were waiting for the next weekly
government report on U.S. natural gas inventories on Thursday.

A Reuters poll on Wednesday showed most were expecting
stocks to have gained 52 billion cubic feet last week, a build
that would again sharply cut the inventory surplus to last year
and the five year average.

Storage builds have fallen below the seasonal norm for eight
straight weeks. Traders, eyeing more strong weather-related
demand ahead, expect that to continue for at least another two
or three reports.

Data last week from the Energy Information Administration
showed that total domestic gas inventories for the week ended
June 15 rose by 62 bcf to 3.006 trillion cubic feet. It was the
earliest ever that stocks climbed above 3 tcf.

The build trimmed the surplus to last year to 680 bcf, or 29
percent above the same week in 2011. It also reduced the excess
versus the five-year average, cutting the total to 641 bcf, or
27 percent. (Storage graphic: link.reuters.com/mup44s)

While the inventory surplus to last year is down sharply in
the last three months, traders note that total storage is
already 73 percent full and hovering at a level not normally
reached until late August. Producing-region stocks are at 83
percent of capacity.

The storage surplus to last year will have to be cut by at
least another 435 bcf to avoid breaching the government's
4.1-tcf estimate of total capacity. Stocks peaked last year in
November at a record 3.852 tcf. The EIA expects gas storage to
climb to a record 4.015 tcf by the end of October.

DEMAND UP, PRODUCTION GROWTH SLOWS

Gas demand picked up sharply this year as spring prices hit
10-year lows at $1.90 and prompted many utilities to use more
gas-fired generators to produce power. But gas production is
still flowing at near-record-high levels despite relatively low
prices that have made many dry gas wells uneconomical.

Baker Hughes data on Friday showed the gas-directed rig
count fell last week by 21 to 541, its eighth drop in nine weeks
and the lowest since August 1999.

(Rig graphic: r.reuters.com/dyb62s )

A 42 percent drop in dry gas drilling in the last eight
months has fed perceptions that producers are getting serious
about stemming the flood of record gas supplies.

Dry gas drilling has become largely uneconomical at current
prices, but drillers have been moving rigs to more profitable
shale oil and shale gas liquid plays which still produce plenty
of associated gas that ends up in the market after processing.

(Editing by Sofina Mirza-Reid and Jim Marshall)