US natgas futures edge lower again ahead of storage data

* Front month still below last week's 7-1/2-month high

* Milder weather on tap for consuming regions

* Stir in tropical activity has some traders cautious

* Coming Up: EIA natgas storage data Thursday

By Eileen Houlihan

NEW YORK, Aug 9 (Reuters) - U.S. natural gas futures edged lower for a
second straight session in early trading Thursday, ahead of weekly government
storage data expected to show a healthy build to already bloated inventories.

In addition, milder weather on tap for consuming regions of the nation after
a blazing hot summer so far was seen curbing air-conditioning loads in the
coming weeks.

Most traders also expect prices will have a hard time breaking back above
the $3 per million British thermal unit level, where gas tends to lose much of
its appeal over coal for power generation.

As of 9:11 a.m. EDT (1311 GMT), front-month September natural gas futures on
the New York Mercantile Exchange were at $2.893 per mmBtu, down 4 cents,
or a little more than 1 percent.

The nearby contract rose to $3.277 early last week, its highest level since
December.

Gas prices hit decade-lows below $2 in the spring but rebounded about 65
percent this summer amid record heat and increased demand from utilities
switching from coal to cheaper gas.

The heat has also slowed storage builds below the seasonal norm for 14
straight weeks, pulling a record inventory surplus down nearly 47 percent from
late-March highs.

The trend is expected to continue in this week's gas storage report from the
U.S. Energy Information Administration, with most traders and analysts expecting
data will show a build of about 30 billion cubic feet when it is released today
at about 10:30 a.m. EDT, a Reuters poll showed.

Stocks rose an adjusted 31 bcf in the same week last year, while the
five-year average gain for that week is 45 bcf.

STORAGE REMAINS BLOATED

Last week's EIA gas storage report showed total domestic gas inventories
rose by 28 bcf to 3.217 trillion cubic feet.

The build came in above Reuters poll estimates for a 23 bcf build, but it
again fell well short of the year-earlier gain of 43 bcf and the five-year
average increase for the week of 56 bcf.

Lagging storage builds this season have raised expectations that record-high
storage can be trimmed to more manageable levels in the 15 weeks left before
winter withdrawals begin.

The weekly injection trimmed the surplus to last year to 472 bcf, or 17
percent, above the same week in 2011. It also sliced the excess versus the
five-year average to 407 bcf, or 14 percent.

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

But total storage remains at record highs for this time of year and, at 78
percent full, stands at a level not normally reached until mid-September.
Producing-region stocks, which lost 6 bcf last week, are at 83 percent of
estimated capacity.

Concerns remain that the storage overhang could drive prices to new lows
later this summer if inventories climb to levels that would test the
government's 4.1-tcf estimate of capacity.

The EIA this week revised its estimate for end of October gas in storage to
3.954 tcf from a previous 4.002 tcf estimate.

HIGH PRODUCTION

Baker Hughes drilling rig data last week showed the gas-directed rig count
fell for the 10th time in 11 weeks to a 13-year low of 498.

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

Dry gas drilling has become largely uneconomical at current prices, and a 47
percent drop in the gas rig count over the last nine months has fed expectations
that producers were getting serious about slowing record output.

But drillers have moved rigs to more-profitable shale oil and shale gas
liquid plays that still produce plenty of associated gas that ends up in the
market after processing.

EIA's gross gas production report this week showed May output was unchanged
from April at 72.39 bcf per day, just shy of January's record of 72.74 bcfd.

Traders have been looking for signs that relatively low gas prices might
finally slow record output, but production is still at 3 bcfd, or 4.3 percent,
above the same year-ago month.

The EIA, in its short-term energy outlook this week trimmed its estimate for
domestic gas production growth in 2012, but still expects output this year to be
up 3.8 percent from 2011's record levels.

The agency said it expected marketed natural gas production in 2012 to rise
by 2.5 bcf per day to a record 68.72 bcfd, down slightly from its July outlook
that had output this year at 68.98 bcf daily.

MORE FUNDAMENTALS

The National Weather Service's six- to 10-day outlook issued on Wednesday
called for above-normal temperatures across the Southwest and Texas and mainly
normal readings elsewhere.

On the nuclear front, total outages were at 7,100 megawatts, or 7 percent of
U.S. capacity, on Thursday, up from 5,900 MW out on Wednesday and a five-year
outage rate of about 5,300 MW but near flat with the 7,160 MW out a year ago.

The U.S. National Hurricane Center said a low pressure system about 1,000
miles west of the southern Cape Verde Islands had a 70 percent chance of further
development in the next few days. Tropical Storm Ernesto, meanwhile, was located
near the Gulf Coast of Mexico. The storm had caused some of the country's
busiest ports and installations to shut on Wednesday.

The remnants of post-tropical Florence well northeast of the Northern
Leeward Islands had a very low chance to regenerate in the next 48 hours, the
NHC said. Elsewhere, tropical cyclone formation was not expected.

The latest government statistics show the Gulf of Mexico federal offshore
region accounts for about 23 percent of total U.S. crude oil production and
about 7 percent of total U.S. dry natural gas production.

(Reporting by Eileen Houlihan)