U.S. natgas futures seesaw early despite more heat

* Front-month below recent six-month spot high

* Hot weather still on tap in 6- to 10-day outlooks

* Recent storage data, drilling rig data supportive

* Coming Up: API oil data Tuesday, EIA gas data Wednesday

By Eileen Houlihan

NEW YORK, July 16 (Reuters) - U.S. natural gas futures seesawed on either
side of unchanged early Monday, with forecasts for more hot weather and heavy
air conditioning demand expected to limit losses.

But most traders expect prices will have a hard time breaking back above
their recent 6-month spot high over $3 per mmBtu, a level where gas tends to
lose its appeal over coal for power generation.

As of 9:14 a.m. EDT (1314 GMT), front-month August natural gas futures on
the New York Mercantile Exchange were at $2.869 per mmBtu, down 0.5 cent.

The nearby contract rose to $3.06 in early July, the highest mark for a
front month since early January, according to Reuters data.

Since posting a 10-year low of $1.902 twice in late April, gas futures are
up about 51 percent on signs that record production was finally slowing and
demand picking up as more electric utilities switched from coal to gas.

BELOW AVERAGE BUILDS, BUT STOCKS STILL BLOATED

Last week's gas storage report from the U.S. Energy Information
Administration showed total domestic gas inventories rose by 33 billion cubic
feet to 3.135 trillion cubic feet.

The build came in above Reuters poll estimates for a 26 bcf gain, but fell
well short of the year-ago and five-year average gains for that week, the 11th
straight week builds have fallen below seasonal norms.

The trend has 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
will continue for at least another two reports, further reducing the overhang.

The weekly build trimmed the surplus to last year to 21 percent above the
same week in 2011 and also sliced the excess versus the five-year average to 20
percent.

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

Lagging weekly 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 reaching the government's 4.1-tcf estimate of total capacity.
Stocks peaked last year in November at a record 3.852 tcf.

Early injection estimates for this week's EIA report range from 13 bcf to 44
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 overhang could still drive prices to new lows later
this summer as storage caverns fill.

PRODUCTION STILL HIGH

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 released last week, the 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.

Data from Baker Hughes on Friday showed the gas-directed rig count fell by
20 to a 13-year low of 522. It was the seventh drop in the past eight 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 were 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.

MORE FUNDAMENTALS

The National Weather Service's 6- to 10-day outlook issued on Sunday called
for above-normal readings for nearly the entire nation, with below-normal
readings only on a slim portion of the West Coast.

Nuclear power plant outages were running at about 7,800 megawatts, or 8
percent, on Monday, up from 6,100 MW out a year ago and a five-year outage rate
of just 5,200 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 John Picinich)