UPDATE 3-US natgas futures up 2 pct ahead of Thursday's EIA data
* Buyers step in expecting light stock build on Thursday
* Warmer extended forecasts prop up prices
* Coming Up: EIA, Enerdata natgas storage data on Thursday (Releads, adds quote, spread data, updates with closing prices)
By Joe Silha
NEW YORK, July 11 (Reuters) - U.S. natural gas futures closed higher on Wednesday, lifted by technical buying ahead of Thursday's weekly inventory report and by forecasts for warmer weather later this week and next week that should increase air conditioning use.
A warm summer so far and power companies switching from coal to cheaper gas have driven natural gas futures up about 50 percent since posting a 10-year low of $1.90 per mmBtu in April.
"It's been a very choppy market, but I think we're going to test higher levels. The storage surplus, while still big, should continue to shrink with more hot weather ahead," a New England-based broker said, noting expectations that government data on Thursday will show another below average storage build.
Front-month gas futures on the New York Mercantile Exchange ended up 11.6 cents, or 4.2 percent, at $2.853 per million British thermal units after trading between $2.718 and $2.861. The gain follows a 5.1 percent loss on Tuesday.
Relative strength in the front contract narrowed spreads to winter months, with the December premium to August ending at 51.9 cents, down 3.7 cents from Tuesday and nearly 35 percent below this year's peak of 79.3 cents set one month ago.
Private forecaster MDA EarthSat noted the six- to 10-day outlook trended warmer today for the Northeast and Midwest, with some much-above normal temperatures expected next week. Normal readings were anticipated across the South.
While the weather still looks supportive, many technical traders expect prices to have a hard time breaking back above last week's six-month spot high of $3.06.
They note the market has struggled as prices near the $3 mark, a level that could cause gas to lose its competitive edge over coal for power generation and again slow overall demand.
In addition, they note that in spite of a below-average string of storage builds this summer, inventories are still at record highs for this time and well above last year and the five-year average.
ANOTHER BELOW AVERAGE STORAGE BUILD
Traders and analysts awaited Thursday's U.S. Energy Information Administration report on U.S. natural gas inventories.
A Reuters poll on Wednesday showed most were expecting stocks to have gained 26 billion cubic feet last week, a build that would again sharply cut the inventory surplus to last year and the five-year average.
Stocks rose 87 bcf during the same week last year, while the five-year average increase for that week is 90 bcf. (Storage graphic: link.reuters.com/mup44s)
Weekly storage builds have fallen below the seasonal norm for 10 straight weeks and helped pull the surplus to last year - now at about 602 bcf - down by a third from late-March highs.
Traders, expecting strong weather-related demand ahead, believe that trend of lower builds will continue for at least another two or three reports.
EIA storage data last week showed that total domestic gas inventories for the week ended June 29 climbed to 3.102 trillion cubic feet, a level not normally reached until early September.
Total storage is now about 76 percent full, with producing-region stocks at 84 percent of estimated capacity.
The storage surplus to last year will have to be cut by at least another 355 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. EIA estimates that gas storage will climb to a record 4.002 tcf by the end of October.
Concerns remain that the storage overhang could still drive prices to new lows later this summer as storage caverns fill.
HIGH PRODUCTION, RISING DEMAND
While gross U.S. gas production has slowed some from January's record highs, output is still flowing at near all-time peaks despite declines in dry gas drilling and planned output cuts by several key producers.
In its July Short-Term Energy Outlook on Tuesday, EIA raised its estimates for marketed gas production and consumption growth in 2012.
The agency expects marketed natural gas production in 2012 to rise by 2.8 bcf per day, or 4.2 percent, to a record 68.98 bcfd. Consumption this year is seen climbing by 3.3 bcfd, or 4.9 percent, to 69.91 bcf daily.
EIA expects a 21 percent jump in electric power use in 2012, primarily driven by utilities switching from coal to gas, to more than offset declines in residential and commercial use.
A 42 percent drop in dry gas drilling rigs in the last nine months has stirred expectations that producers were getting serious about stemming the flood of record gas supplies.
(Rig graphic: r.reuters.com/dyb62s)
The problem is that the number of horizontal rigs, the type most often used to extract oil or gas from shale, is just shy of the record high of 1,193 hit in May.
Drillers continue to move rigs to more profitable shale oil and shale gas liquid plays that still produce plenty of associated dry gas that ends up in the market after processing.
That has slowed the overall drop in dry gas output. (Reporting By Joe Silha; Editing by John Picinich and Bob Burgdorfer)
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