U.S. natgas futures slip 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 17 (Reuters) - U.S. natural gas futures edged lower in early trading Tuesday, but most traders expect continued hot weather to limit the downside.
Others said prices will have a hard time breaking back above their recent six-month spot high over $3 per mmBtu, a level where gas tends to lose its appeal over coal for power generation.
As of 9:10 a.m. EDT (1310 GMT), front-month August natural gas futures on the New York Mercantile Exchange were at $2.781 per mmBtu, down 2 cents.
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 47 percent on signs that record production is finally slowing and demand picking up as more electric utilities switch 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 was 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 46 bcf, with most in the low-30s 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 bcf daily, or 4.9 percent, to 69.91 bcf daily.
Data from Baker Hughes last week 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 44 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.
The National Weather Service's 6- to 10-day outlook issued on Sunday again called for above-normal readings for nearly the entire nation, with below-normal readings only on a slim portion of the West Coast and some near-normal readings in the South.
Nuclear power plant outages were running at about 7,500 megawatts, or 7 percent, on Tuesday, up from 7,200 MW a year ago and a five-year outage rate of just 4,900 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 John Wallace)
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