UPDATE 3-US natgas futures end higher after early selling on EIAs
* Front month slides after big EIA build, then ends higher
* Warm forecasts for the next two weeks help prop up prices
* Technical buying at support also backs gains
* Record inventories, high production a concern for bulls
* Coming Up: Baker Hughes rig data, CFTC trade data Friday (Releads, adds quote, updates with closing prices)
By Joe Silha
NEW YORK, July 12 (Reuters) - U.S. natural gas futures, off early after a bearish weekly inventory report, ended slightly higher on Thursday on technical buying and warm U.S. weather forecasts for the next two weeks that should boost air conditioning demand.
The U.S. Energy Information Administration report showed total domestic gas inventories rose last week by 33 billion cubic feet to 3.135 trillion cubic feet.
The build came in above a Reuters poll estimate of 26 bcf but fell well short of the year-ago and five-year average gains for that week.
"The market fell initially because the (EIA storage) build was above expectations, but when you take a step back, it was really a bullish number," a Houston analyst said, noting the injection came in well below the historical norm for that week.
He also said technical buying likely kicked in when support in the low-$2.70s per mmBtu held after the initial selloff.
Front-month gas futures on the New York Mercantile Exchange ended up 2.1 cents at $2.874 per million British thermal units, after sinking to an intraday low of $2.72 following the EIA report. Prices have mostly been stuck in a range between the $2.70s and $2.90s for the last two weeks.
Weekly storage builds have fallen below the seasonal norm for 11 straight weeks and helped pull the surplus to last year - now at about 548 bcf - down by 38 percent from late-March highs.
Traders, expecting strong weather-related demand ahead, believe the trend of below-average builds will continue for at least another two reports, further reducing the overhang.
Forecaster MDA EarthSat expects above-normal temperatures to dominate the northern half of the country for the next two weeks, with southern tier readings remaining near normal.
But while the weather still looks supportive in the near term, traders noted that as gas prices near the $3 mark utilities are likely to use more coal to generate power.
An unexpected surge in gas demand this year as utilities switched from coal to cheap gas to produce electricity helped drive futures up about 50 percent from the 10-year low of $1.90 hit in April.
ANOTHER BELOW-AVERAGE BUILD
The weekly injection trimmed the surplus to last year by 54 bcf to 548 bcf, or 21 percent above the same week in 2011. It also sliced 57 bcf from the excess versus the five-year average, reducing that surplus to 516 bcf, or 20 percent above average.
(Storage graphic: link.reuters.com/mup44s)
Lagging storage builds have raised expectations that record-high storage can be trimmed to more manageable levels in the 18 weeks or so left before winter withdrawals begin.
But total storage is still at record highs for this time of year and stands at about 76 percent full, a level not normally reached until the first week of September. Producing-region stocks are at 84 percent of estimated capacity.
The storage surplus to last year will have to be cut by at least another 300 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.
Early injection estimates for next week's EIA report range from 13 bcf to 38 bcf versus last year's build of 67 bcf and the five-year average increase for the week of 74 bcf.
Concerns remain that the storage overhang could still drive prices to new lows later this summer as storage caverns fill.
STILL-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.
EIA on Tuesday raised its estimates for marketed gas production and consumption growth this year.
The agency expects marketed natural gas production in 2012 to rise by 4.2 percent to a record 68.98 bcf daily. Consumption this year is seen climbing 4.9 percent to 69.91 bcfd.
EIA expects a 21 percent jump this year in gas demand from the electric power sector, primarily from utilities switching away from pricier coal, to more than offset declines in residential and commercial use.
Traders were waiting for the next Baker Hughes drilling rig report, due out on Friday. Last week's data showed the gas-directed rig count rose by 8 to 542 after hitting a 13-year low the prior week. It was the first gain in seven weeks.
(Rig graphic: r.reuters.com/dyb62s )
A 42 percent drop in dry gas drilling in the last nine months has stirred expectations that producers are getting serious about stemming the flood of record gas supplies.
But horizontal rigs, the type most often used to extract oil or gas from shale, are hovering just shy of the record high 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. (Additional reporting by Eileen Houlihan. Editing by John Picinich, John Wallace and Jim Marshall)
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