U.S. natgas futures little changed near 7-month high

* Front month at highest level since December

* Some heat still on tap in long-term outlooks

* Recent storage data, drilling rig data supportive

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

By Eileen Houlihan

NEW YORK, July 24 (Reuters) - U.S. natural gas futures were
little changed to slightly higher in early trading Tuesday,
hovering near a seven-month spot chart high as continued heat
and ongoing nuclear power plant outages boosted demand.

As of 9:22 a.m. EDT (1322 GMT), front-month August natural
gas futures on the New York Mercantile Exchange were at
$3.142 per million British thermal units, up 2.5 cents.

The nearby contract rose as high as $3.153 in electronic
trade, the highest mark for a front month since late December.

But most traders expect prices will have a hard time
remaining above the $3 level, where gas tends to lose its appeal
over coal for power generation.

Since posting a 10-year low of $1.902 in late April, gas
futures are up 65 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 28 billion cubic feet to 3.163 trillion cubic feet.

The build came in below Reuters poll estimates for a 34 bcf
gain and fell well short of last year's gain of 67 bcf and the
five-year average increase for that week of 74 bcf. It was the
12th straight week builds have fallen below seasonal norms.

The trend has helped pull the surplus to last year - now at
about 509 bcf, or 19 percent - down by 38 percent from
late-March highs, raising expectations that record-high storage
can be trimmed to more manageable levels in the 17 weeks left
before winter withdrawals begin.

Storage now stands 470 bcf, or 17 percent, above the
five-year average.

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

But total storage is about 77 percent full, a level not
normally reached until the second week of September.
Producing-region stocks are at 84 percent of estimated capacity.

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

The storage surplus to last year must be cut by at least
another 260 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. EIA estimates that gas storage will climb
to 4.002 tcf by the end of October.

Early injection estimates for this week's EIA report range
from 19 bcf to 50 bcf versus last year's build of 48 bcf and the
five-year average increase for the week of 61 bcf.

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 recent July short-term energy outlook, 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 on Friday showed the gas-directed rig
count fell by four to a 13-year low of 518. It was the eighth
drop in the past nine weeks.

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

A 45 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 Monday called for above-normal temperatures for much of the
eastern two-thirds of the nation, with below-normal readings
only on the West Coast and some normal readings in the South and
New England.

On the nuclear front, total outages tallied 9,400 megawatts,
or 9 percent of total U.S. capacity on Tuesday, down from 10,200
MW out on Monday, but well above the 3,400 MW out a year ago and
a five-year outage rate of 4,800 MW.

The U.S. National Hurricane Center said a non-tropical low
pressure system east-northeast of Bermuda had a low, 10 percent
chance of further development 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)