U.S. natgas futures edge higher ahead of holiday

* Front-month below last week's 5-1/2 month high

* Heat still on tap in six to 10-day outlooks

* Recent storage data, drilling rig data supportive

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

By Eileen Houlihan

NEW YORK, July 3 (Reuters) - U.S. natural gas futures edged
higher in early trading on Tuesday, with hot weather on tap for
much of the nation helping to keep prices firm.

Last week nearby futures rose to a 5-1/2 month spot chart
high in what has become a scorching start to summer.

But most traders expect little more upside, with prices
hovering near the 200-day moving average of $2.83 per million
British thermal units.

Analysts expect the market will have a hard time breaking
the $3 level, where gas loses its appeal over coal for power
generation.

Up to 100 natural gas wells remained shut in northern
Colorado on Monday to safeguard against wildfires that have
spread across the state over the past week. The Piceance Basin,
in northwest Colorado, produces about 2 billion cubic feet per
day of output.

As of 9:12 a.m. EDT (1305 GMT), front-month August natural
gas futures on the New York Mercantile Exchange were at
$2.848 per mmBtu, up 2.4 cents.

NYMEX will be closed on Wednesday for the U.S. Independence
Day holiday.

Last week the front month contract traded as high as $2.946,
its highest mark since early January.

Since posting a 10-year low of $1.902 twice in late April,
nearby futures are up about 49 percent on signs that record
production was finally slowing and demand picking up as more
electric utilities switched from coal to gas.

ANOTHER BELOW-AVERAGE BUILD, BUT STILL BLOATED INVENTORIES

Last week's gas storage report from the U.S. Energy
Information Administration showed total domestic gas inventories
rose by 57 billion cubic feet to 3.063 trillion cubic feet.

The build, while above Reuters poll estimates for a 52 bcf
gain, fell well short of last year's gain of 84 bcf and the
five-year average increase for that week of 85 bcf. It was the
ninth straight week the build was below average.

Lagging storage builds this season have raised expectations
that record-high inventories can be trimmed to more manageable
levels in the 20 weeks left before winter withdrawals begin.

The weekly injection trimmed the surplus to last year to 653
bcf, or 27 percent, and sliced the excess versus the five-year
average to 613 bcf, or 25 percent.

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

Total storage is already 75 percent full and hovering at a
level not normally reached until late August. Producing-region
stocks are at 84 percent of estimated capacity.

Concerns remain that the storage overhang could still drive
prices to new lows this summer as storage caverns fill.

The storage surplus to last year will have to be cut by at
least another 405 bcf to avoid breaching the government's
4.1-tcf estimate of total capacity.

Early injection estimates for this week's EIA report, which
will be delayed one day until Friday due to the U.S.
Independence Day holiday on Wednesday, range from 38 bcf to 55
bcf versus last year's build of 90 bcf and the five-year average
increase for the week of 79 bcf.

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 and prompted many utilities to use more gas-fired
generation 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.

EIA's gross gas production report on Friday showed that
April output rose 0.8 percent from March to 72.48 bcf per day,
just shy of January's record of 72.74 bcf daily.

But data from Baker Hughes last week showed the gas-directed
rig count fell to 534, its ninth drop in 10 weeks and its lowest
level since August 1999.

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

Horizontal rigs, the type most often used to extract oil or
gas from shale, however, rose for a second straight week, and at
1,171 are just shy of the record high 1,193 hit six weeks ago.

A 43 percent drop in dry gas drilling in the last eight
months has stirred expectations 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 that still produce plenty
of associated gas that ends up in the market after processing.

That has slowed the overall drop in dry gas output.

MORE FUNDAMENTALS

The National Weather Service's 6- to 10-day outlook issued
on Monday called for above-normal readings for much of the
nation, with normal readings in the Northeast, Florida and in
Texas.

Nuclear power plant outages were running at about 8,500
megawatts, or 8 percent, on Tuesday, up from 5,100 MW out a year
ago and a five-year outage rate of just 3,900 MW.

The U.S. National Hurricane Center said tropical cyclone
formation was not expected over the next 48 hours. The Atlantic
hurricane season runs from June 1 through Nov. 30.

The latest government statistics show the Gulf of Mexico
accounts for 6 percent of U.S. gas production and just over 20
percent of U.S. oil production.

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